U.S. stock market earnings are likely to be much weaker than the market expects, with a number of key bellwether companies already offering lower earnings outlooks, Tobias Levkovich, chief U.S. equity strategist at Citigroup says.
Mr. Levkovich said that earnings across a broader range of sectors, other than just Consumer Discretionary and Financials, will be under pressure in the next few quarters because of the laggard impact of tighter credit conditions and its impact of industrial activity.
He said weakening trends in Europe as well as countries such as Vietnam and Turkey would also weigh on company profits earned abroad.
Mr. Levkovich said:
Although profits earned overseas may continue to increase year over year in the forthcoming quarters, they are almost sure to decelerate substantially, diminishing the net benefit that has been in place for the past three years.
Citigroup forecasts the S&P 500 earnings per share growth to increase by 1.2% in 2008, much lower then the market consensus of 6.6%. In the second quarter, earnings for the S&P 500 are expected to fall by 8.9% over the year after falling 3.1% in the first quarter.
Mr. Levkovich says he expects the stock market to become more volatile through most of the summer, but likely post a late-year recovery.
But as earnings difficulties spread throughout the economy, we would advise staying in already beaten up sectors with dismal investor expectations such as Banks, Diversified Financials, Insurance,, and Retailing, and avoid those with buoyant sentiment, aggressive revision trends and unattractive valuations including Energy, Capital Goods and Materials.