ETF Trends
ETF Trends

S&P 500 companies are on pace to deliver record earnings in the second-quarter reporting season despite a lackluster global economy.

“Through last Thursday, 135 of the S&P 500 companies, representing 39% of the market cap of the index had reported with 70% beating night-before expectations on earnings and 83% beating night-before expectations on revenues,” said David Kelly, chief market strategist at JP Morgan Funds.

“This week, another 182 companies are due to report representing a further 31% of the capitalized value of the index,” Kelly wrote in an outlook Monday. “If current trends persist, S&P500 operating earnings for the second quarter will end up between $24.10 and $24.50 [a share], beating the old record high of $24.06 set back in the second quarter of 2007.”

Perhaps lost in all the debt and unemployment doom and gloom is that corporate America is churning out record profits after slimming down due to the credit crisis.

“This achievement, if it is realized, will be all the more remarkable as it will have occurred in a quarter when GDP grew by just 2% annualized, unemployment averaged more than 9% and two-thirds of the American people believed we were in recession,” Kelly said. “In this regard, it is important to note that the value of stocks depends not on GDP or wages or confidence.  It depends on profits and while the uncertainty caused by a slow-moving economy and debt troubles both here and abroad may be limiting current stock market gains, if this uncertainty does diminish in the months ahead, the outlook for stocks could brighten significantly.”

In the first quarter, the S&P 500 earned $23 a share in operating earnings. “That’s within a short stone’s throw of the all-time prior record … in the second quarter of 2007, despite a far more depressed economy than in the hold housing market bubble heyday of the last decade,” said Nicholas Colas, chief market strategist at ConvergEx Group.

“U.S. public companies have proven that they can earn excellent returns in a lackluster economic environment,” he added.

However, in a report earlier this month Colas noted some Wall Street analysts were scaling back their second-quarter revenue estimates.

“Revenue growth is a necessary component to a continued – really, a justifiable continued – advance for U.S. stocks,” he wrote. “Cost cutting has taken the market a long way from the March 2009 lows, to be sure.”

But to convince investors there is more room to increase earnings, revenue – the top line – needs to grow. “The unicycle of lean cost structures isn’t enough to earn a higher market multiple,” the strategist said.

SPDR S&P 500 ETF (NYSEArca: SPY)


The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.