US earnings update

1Q07 earnings for S&P 500 companies grew 8.3% bringing to an end a record streak of 14 consecutive quarters of double-digit earnings growth. Earnings slowed in line with a sluggish economy that grew 0.6% during the quarter. According to Thompson Financial's latest estimates 2Q07 earnings are expected to be around 3.8%.

Now we should remember that at one point 1Q07 earnings were expected to come in at around 3.3% so there is plenty of room for upside. One of the reasons many companies beat market estimates in 1Q07 was because of international exposure. About one-third of S&P500 companies have international operations. Strong global growth and a weak dollar have helped overseas operations post some healthy results offsetting lacklustre domestic demand. Wal-mart as mentioned a while back is a good case in point.

However the US consumer, which some economists are predicting needs to take a breather, are one of the drivers of global growth. A significant pullback by the US consumer would affect global growth rates. Also lets not forget that massive buybacks by many S&P500 companies are predicted to account for around 3.4% of earnings growth this year.

The argument that the market is not expensive on a P/E basis can change rapidly. Without a pullback in stock prices forward PE multiples expand considerably with low earnings growth. Could it be that analysts were a quarter too early in predicting gloomy earnings or are they just a bunch of conservative pessimists? It wouldn't be surprising as happened in 1Q07 for earnings to be much better than expected.

One sector that could surprise to the upside is the energy sector which is currently benefitting from higher prices. We may get a sneak preview of what's in store for 2Q07 earnings in the next few weeks as some companies come out with earnings pre-announcements. The Dow shed 410 points in 3 days last week and then regained more than a third of that loss on Friday. Expect more volatility to come as we get closer to 2Q07 earnings results.