Q2 Earnings Will Be Better than Expected

The stock markets and many other markets, as well, appear to be waiting for new news to give them direction. Most investors are now looking for a very gradual uptick in the economy in the third quarter, as well as modestly better housing news, and fewer nerve wrenching headlines from the banking sector.

Yet, even though things are "less bad" now, few strategists are able to find many of the green shoots that Chairman Bernanke speaks of sprouting leaves.

In our investment meeting Monday morning, we went over the news of the day and the most recent economic data, and we find that our views are essentially those of the consensus except in one area -- earnings.

We believe corporate earnings in the second quarter will be better than expected. To you old pros that is like saying nothing because quarterly reported earnings are almost always better than expected. That is the game that corporate America plays: beat the consensus earnings estimates by a penny or so. However, we think this quarter may show more corporations beating earnings estimates more than usual.

Three of our four portfolio managers have run large organizations in their previous careers. They all agree that the revolution in corporate management tools of the last 25 years has given top management a much wider field of vision in terms of input needs and utilization.

Enterprise Resource Planning (ERP) software, Just-in-time inventory management processes, and new more flexible labor arrangements have all come together to enable the top management of most companies to "right size" employment and inventory. In our view, this right sizing translates into a much higher probability that companies can price right, and by extension price profitably.

We believe these smarter and more flexible management tools will begin to reveal themselves in the upcoming second quarter earnings results. Having said this, strap yourselves in; even good earnings news will send stocks gyrating.

Comments

[Ryu Mei Co:]

I am pretty sure the Q2 earnings will be good considering billions of dollar money that had been pushed into the market and borrowing our future money into saving this god-forsaken economy.

Whatever the outcome, everybody is just waiting.........

Jun 30 03:01 AM

[Isnt_It_Jus...:]

Hmmmmmmmmm, kinda makes you wonder though why all those corporate insiders are selling...

Jun 30 09:34 AM

[Fred Voetsch:]

"We believe corporate earnings in the second quarter will be better than expected."


They had better be significantly better if you wish to justify a normalized 20 P/E ratio.

S&P estimates a 24 P/E ratio in late 2010 based on steady growth from now until then. Given that there is simply no way we get anything better I suggest the stock market deserves a 10 P/E, which means that we should easily see the S&P a well under 500 within the next year.

This is not negative thinking; I do not believe the world is going to end; this is basic logic based on historical data - As-Reported earnings and historic valuations going back aout a century.

Jun 30 01:47 PM

[Fred Voetsch:]

Here is a link to the S&P data for my post:
www2.standardandpoors....

Jun 30 01:48 PM

[Moon Kil Woong:]

Overall earnings almost always beats forecasts. It is designed that way mainly because analysts like to stroke the back of those they cover more than companies finding ways to hockey stick their numbers (although I'm sure this happens too). Thus one should look at the market response as well as total revenues and EBIT earnings(harder to mask).

You generally know way beforehand if earnings will be good simply because companies tend to like to report bad earnings before their expected release date. Thus magically bad earnings tend to show up first and most all good earningas end up at the end of the reporting cycle. Perfect for the market and stock promoters. Fancy that!

Who says the market can't be rigged? it is rigged by design to the point it is now systemic and predictable.

Jul 01 03:03 AM

[Ted Hurlbut:]

In the retail sector, earnings will be driven by cost savings, as they were in Q1. Those savings have now been wrung out, so the challenge for retailers going forward will be to demonstrate they can move the top line. That may not occur until Q4, when the same-store sales comps turn more favorable.

Jul 01 04:23 PM