US turns focus to 2Q07 earnings

The focus in the US turns to earnings this week as the 2Q07 earnings season begins in earnest. The consensus is that earnings will slow but still be decent. Thompson Finanical expects 2Q07 growth of 4.1% for S&P500 companies, about half the 1Q07 growth rate of 7.9%. If that were the case it would be the slowest growth rate since 2Q02.

However analysts have a penchant for slashing earnings estimates going into reporting season. Last quarter growth was anticipated at 3.3%, well under the final figure. It will be interesting to see if the consensus proves to be on the conservative side again. Industrials and technology are expected to be the star performers this quarter whilst consumer discretionary is expected to drag earnings down, particularly autos and home builders.

As usual Alcoa will get proceedings underway reporting today. Analysts anticipate profit to fall 8% to 83 cents a share, excluding special items, from 90 cents a share a year ago. The aluminum market has suffered from the double whammy of a downturn in US housing and the production of light vehicles and heavy trucks. However this has been offset to a certain extent by the continued strong demand from overseas markets particularly China.

Since 2002 the earnings yield on S&P 500 stocks has easily beat fixed interest, however as bond yields rise and earnings slow the gap between the two narrows. Earnings growth of less than 5% this quarter and even lower expectations for 3Q07 may be enough impetus for more investors to seek the safety of cash with a similar return without the risk.