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The S&P 500 may be rocked with corrections from time to time, but they never endure, or so recent history shows. The S&P closed yesterday at less than 1% under its post-2000 high. So far this year, the S&P 500 is up 2.6%. For the past 12 months, the index has climbed 13.9%. If price is taken at face value, optimism continues to dominate the world of equities trading.

How does one square that with the news that earnings growth is decelerating? As The New York Times reported over the weekend, S&P 500 earnings are no longer rising at a double-digit rate, as they were previously in recent years. Something less impressive now appears to be taking root. Earnings for the index "are expected to grow by only 3.3 percent in the first quarter of 2007, according to Thomson Financial," the Times advised. "This represents a huge drop in expectations, as Wall Street analysts at the start of this year were expecting a first-quarter growth rate of 8.7 percent."

Perhaps it'll be a sign of some relevance if the index makes a new high for the post-2000 era, although there's reason to wonder if that's imminent. "I think we're all anticipating the earnings season," Tim Hartzell, chief investment officer at Kanaly Trust Co., told AP. "I think everyone is going to wait on their heels and see how the numbers are going to come through."

Of course, if the numbers don't astonish like they used to, Mr. Market may be inclined to grade on a curve. "Investors have kind of lowered the bar'' for first-quarter earnings, "making it easier for stocks to outperform,'' Christopher Johnson, chief investment strategist at Johnson Research Group, told Bloomberg News. "The numbers that we see coming in aren't much worse than what we saw last quarter. We could see some bright spots.''

Among those bright spots on a sector basis, and in relative terms, are the utilities and telecom corners of the S&P 500. In fact, those are the only sectors forecast to post an improvement over the previous quarter, or so wrote Dirk Van Dijk of Zacks Research. But as reasons to cheer go, the details don't necessarily inspire. Utilities' Q1 earnings will advance 6.9%, Zacks predicts. Yes, that's a hefty upgrade from the big zero that defined the earnings change for utilities in the fourth quarter. On the other hand, 6.9% is still below the anticipated 7.1% rise for S&P 500 earnings overall.

The telecom story is even less encouraging. Zacks said that telecom earnings will be unchanged in Q1. Of course, that's better than -10.7% logged in last year's fourth quarter. As bullish news goes, this is thin gruel.

Perhaps the optimists will find greener pastures by focusing on individual names for the time being. Alcoa (NYSE:AA), to cite the current favorite, charmed everyone by beating the consensus earnings prediction and reporting a 9% rise in profits.

But how many Alcoas are poised to bloom? Perhaps fewer than prudence suggests. Zacks' Van Dijk certainly pulled no punches when he wrote: "Looking at the full expectations for the quarter, we see that a substantial slowdown in year-over-year earnings growth is expected in the first quarter, almost across the board."

So, while the S&P 500 remains less than 1% below its recent high, forging a new peak may take a bit longer than the recent bullish momentum suggests. But for the moment, at least, we still have Alcoa.

Source: Q1 Earnings: Grading On A Curve?