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Get Four
|  | FEBRUARY 16, 2005
 SAM STOVALL'S SECTOR WATCH By Sam Stovall Maybe 2005 Won't Be So Bad The possible negative trends feared in January seem to be dissipating, leading to hope that this bull isn't ready to drop yet Three-quarters of the way through January -- when the S&P 500-stock index was off 3.6%, and the S&P SmallCap 600 was down 5% -- it appeared to us at Standard & Poor's that investors were adjusting their expectations to include additional "disappointment factors" into their 2005 investment outlook, among them the possibilities that: • Oil prices could hover at or above $50 per barrel, rather than fall to around $40, as had been previously expected • Future S&P 500 operating earnings growth might only meet -- not beat -- expectations this time around • Inflation may begin to accelerate above the projected 2.5% level for 2005 • The Fed would, as a result, start raising rates faster than expected -- maybe even by 50 basis points at its March meeting • A flattening yield curve would signal slowing gross domestic product growth and the possibility of a recession. But here it is in mid-February, and the index has reversed its losses -- and some of last month's gloom may have dissipated. What happened to change things? Let's run down the list. Oil: It certainly looked like oil prices would do their part to dampen investor spirits. Just before the first major snowstorm in the Eastern U.S. this season, oil traders began pushing up prices to near $50 per barrel on concerns that the 2004-05 heating season would be colder than normal. With fewer than six weeks remaining in groundhog Punxsutawney Phil's forecast, however, it now appears that this winter will actually be warmer than average, allowing inventories to improve and prices to fall. This adds credibility to Global Insight's projection that West Texas Intermediate (WTI) oil prices will average $46 for the first quarter of 2005 and then edge toward $40 by yearend. Corporate Profits: Earnings growth has also brought some cheer. As of mid-February, more than 80% of the companies in the S&P 500 have reported fourth-quarter 2004 earnings, and actual results may again exceed expectations, as they have for the past two years. Indeed, entering into this profits-reporting period, S&P's equity analysts projected operating earnings to increase 17%, on a year-over-year basis. But as of mid-February, it now looks as if earnings will actually climb 22%, led by upside surprises from the energy and materials sectors. In particular, integrated oil and gas behemoths ExxonMobil (XOM; S&P investment rank 4 STARS, buy; recent price, $56) and ChevronTexaco (CVX; 5 STARS, strong buy; $57) posted significantly better-than-expected results, in part from strong refining and marketing margins, as well as improved industry conditions. In the materials sector, companies in chemicals, diversified metals, industrial gasses, and steel groups posted better-than-expected results from increased pricing and strong demand.
For 2005, S&P analysts haven't increased their earnings projections in the aggregate, which should make comparisons with 2004 more difficult. Our analysts project that the S&P 500 will post a 9% year-over-year earnings increase for the full year, led by double-digit increases in industrials, information technology, materials, and utilities.
BW MALL
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