This change is also being reflected in the Street’s aggregate S&P 500 earning estimates for 2009 and 2010, which appear to be bottoming as shown in Figure 4 (a portion, but not all, of the recent uptick was a result of the removal of General Motors from the index, which was projected to have a large loss). Also worth noting is that despite the substantial rise in crude oil from $45 at the end of last year to its current price above $70, analysts have only raised earnings estimates for 11 of the 40 companies in the energy sector. As long as oil prices do not collapse, we believe analysts will eventually have to adjust their numbers higher to reflect this new reality, helping to support the overall earnings outlook.

Figure 4. S&P 500 Earnings Estimates Appear To Be Bottoming

Source: Factset, Thomson First Call, SunTrust Robinson Humphrey

• The reason we place so much emphasis on earnings trends is that at the end of they day, investors buy companies based on their profit potential. And when confidence in a company’s outlook increases, there is a secondary and important impact beyond the revised growth rate. That is, investors typically require less of a margin of safety when buying stocks since they have a better handle on the true earnings power, which can ultimately help to support higher P/E ratios.

Bottom Line:

Investor expectations have increased from the low levels seen earlier this year when fears of the next Great Depression were elevated, and now it appears it will take more than “less bad news” to move the needle forward on the stock market. In the near term, economic data will likely continue mixed, thus we suspect equities will be confined to a trading range as investors await the next catalyst. We believe that a stronger than expected economic recovery in the second half should help support earnings, which already are showing signs of bottoming, and will be a key factor that ultimately serves to drive equity prices above the recent range—but patience may be required.

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