Earnings Season Kicks Off

By Josh Lipton The next few weeks will see the first few companies reporting earnings for the final quarter of 2010 and, while analysts predict another impressive period of profit growth, expectations for the year ahead remain decidedly more muted. This week, investors will hear the latest quarterly confessionals from Family Dollars Stores (FDO), Monsanto (MON), and Constellation Brands (STZ). Earnings season kicks off with Alcoa (AA) reporting results on January 10. Analysts think that companies in the S&P 500 will report year-over-year earnings growth of 32% for the fourth quarter, according to Thomson Reuters. The Financials, Materials, and Energy sectors have the highest earnings growth rates for the quarter, while the Utilities sector is the only sector forecasting a decline in earnings compared to the year-ago period.

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This represents the fifth consecutive quarter of gains following nine previous quarters of year-over-year earnings declines. The estimated revenue growth rate for the S&P 500 for the fourth quarter is 6%. All ten sectors anticipate revenue growth for the quarter. The Information Technology, Utilities, and Materials sectors have the highest revenue growth rates. As of December 31, there have been 90 negative EPS pre-announcements issued by corporations for the fourth quarter compared to 46 positive EPS pre-announcements. That 2.0 ratio of negative to positive pre-announcements is equal to the long-term norm. All together, S&P 500 companies are forecast to earn $21.74 a share in the fourth quarter, according to Thomson Reuters. That brings full-year forecasts to $84.58 a share, which marks a headline-grabbing 37.8% gain from 2009 ($60.80). However, looking ahead, the pace of profit growth is expected to slow.

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“2010 was an aberration because 2009 was so weak,” says BTIG's Mike O'Rourke. “So we had a big snap-back. But now growth has to slow. You just can't keep growing at 30% per year.” Specifically, for 2011, analysts spin their spreadsheets and expect corporate America to earn a record $95.97 a share. That will represent an impressive but less dramatic gain of 13.4%. Professional prognosticators have in fact been trimming their estimates: in April, they had predicted earnings growth in 2011 of 20.9%.

“I would imagine that, in 2011, corporate profits will be quite good due to massive monetary and fiscal stimulus along with no real disruptions for the global growth story,” says Vinny Catalano, president of Blue Marble Research. “However, in the second half of the year, the growth rate will slow down. The key will be whether the US economy is able to wean itself off these government programs. I remain doubtful.”

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Catalano continues to eyeball opportunity across the pond. He invests in global materials through iShares S&P Global Materials (MXI) as well as global utilities through iShares S&P Global Utilities (JXI), a sector which he's betting will benefit from continued spending by emerging market governments. How does valuation look? The S&P 500 is trading at 22.1 times its earnings over the past 12 months and 13.3 times expected 2011 earnings. The long-term average multiple, strategists note, is 16 times. However, other gauges tell a different tale: the Shiller P/E ratio -- which uses a 10-year average of inflation adjusted earnings -- points to a market that's now overvalued by some 30%. In 2011, the Materials sector is expected to lead the pack, with earnings growth of 30.8%, followed by Financials (20.6%), Industrials (17.9%), Consumer Discretionary (15.4%) and Energy (14.2%).

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