Thursday, July 23, 2009

Imagine This

The above consensus earnings results produced thus far – 109 companies in the S&P 500 (29% of market cap) 10.3% above estimates* – are doing their thing and moving the fence sitters off the fence. No doubt some of the $3.5 trillion sitting in near zero interest rate money market funds is finding its way into equities. In the process, an overbought stock market gets even more overbought – moving right into the S&P 500 resistance zone of 950 – 1000.

As investors reacquaint themselves with their animal spirits, let’s do something constructive and take a moment to assess the investment significance of the aforementioned 10.3% above estimates fact.

Coming into this week, 2Q09 operating earnings estimates for the S&P 500 were around $14 – annualized to be $56, right in the zone of the consensus number for the full year. Well, if the actual results are coming in at 10% higher, then $14 becomes something closer to $15.50, which pushes the annualized number to approximately $62. Accordingly, investors might want to consider the following:

If companies can produce results that are 10% above estimates in the dismal and economically stressed second quarter of this year, what are they likely to do as the global economy continues to make progress toward stabilization and growth? Moreover, what are the likely corporate results for 2010 when the bulk of the US fiscal stimulus package (some $700 billion) kicks in?

Under such conditions, it is conceivable that the $75 S&P 500 operating earnings estimated by the folks over at Goldman (noted in my Tuesday blog posting) may actually be more than a touch on the low side!

Investment Strategy Implications

Stocks are extremely overbought and a move below 900 for the S&P 500 (versus a surge above 1000) is still the higher probability at this time. However, it is advisable that investors understand and respect the potential of a period of explosive earnings from now through the end of 2010.

While much can happen between now and then, the results for 2Q09 produced thus far are providing the evidence of such a scenario – one that is not on the radar screen of most investors, analysts, and investment strategists.

*Sam Stovall, S&P, July 22, 2009

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