• That said, we believe the S&P 500 is likely to see higher levels later in the year, once investors gain greater confidence in an economic rebound and the corporate profit picture becomes clearer.

• Indeed, our SunTrust Chief Economist, Gregory Miller, is becoming more convinced that the economic recovery will prove to be stronger than the current consensus view. He estimates the economy will grow at an average annualized pace of 2.8% in the back half of this year, followed by average increase of 4.2% in 2010. His projections are stronger than the current consensus that calls for a 1.3% rebound in 2H09, and a 1.8% rise in 2010, according to the latest Bloomberg survey. Miller attributes much of his more optimistic projection to the roughly $400 billion, or about half, of the $787 billion of the fiscal stimulus package that the administration expects to deploy from October of this year through September 2010.

• From a stock market perspective, a better than expected economic environment could lead to upside earnings surprises later in the year, or at least stabilization of the negative revision trends that have been a regular occurrence during most of the recession.

• In fact, we are already seeing signs that earnings may be bottoming. One way we measure this is by tracking the percentage of S&P 500 companies that are seeing their current-year earning estimates raised. At the height of the February panic, when the potential for the next Great Depression seemed more plausible, analysts were aggressively reducing the outlooks of companies under their coverage. However, just like many indicators that we have highlighted recently, it appears they overshot to the downside, and in many cases they are now revising their projections higher. Over the past three months, 45% of companies within the S&P 500 have seen their earnings estimates increased, which is up substantially from just 9% in February (Figure 3).

Figure 3. Analysts Have Increased Earnings Estimates For Almost Half Of S&P 500 Companies

Source: Baseline, SunTrust Robinson Humphrey

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