Buybacks prop up US earnings

1Q07 earnings season has surprised to the upside and looks set to continue the trend of double digit earnings growth. According to Zacks latest report with more than three-quarters of S&P companies having reported median year over year earnings growth is tracking at 9.8%. Healthcare (+15%) and Materials (+14.3%) are the star performers whilst Telecoms (-6.7%) Utilities (2.5%) and Techs (3.1%) the laggards. Zacks revisions ratio stands at 1.59 for FY07 which means analysts are making many more upward earnings revisions than downwards and across all sectors. The ratio is even higher for FY08.

On a total earnings basis even despite recent upgrades earnings growth for S&P 500 stocks is expected to be around 8% for 2007, half that of 2006 levels. Interestingly Zacks draws attention to the effect buybacks are having on earnings growth. In 2006 $432 billion was spent on buybacks by S&P 500 companies contributing an estimated 3.5% to earnings growth with a similar contribution expected for 2007. That would place underlying earnings growth by S&P 500 companies at around 4.5%. Hardly inspiring numbers.