Earnings January 15, 2010, 2:54PM EST

Earnings: Beyond That Big Fourth-Quarter Spike

U.S. companies are poised to post the biggest profit gains since the recession began in 2007. Strategists hunt for signs of sustained earnings growth

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Editor's Note: This is an updated version of a story that originally ran on Jan. 11.

Although corporate profits in the fourth quarter will likely be dramatically better than a year ago, CEOs aren't pounding their chests yet.

Most chief executives acknowledge that the fourth quarter brought higher sales but remain reluctant to provide guidance that looks much into the future, says Hank Herrmann, chief executive of Waddell & Reed Financial (WDR), an Overland Park (Kan.) fund company that manages $70 billion.

"A few [companies] are building backlogs, but not a lot. A few people are talking about their book of business improving some, but not a lot," he says. "Part of it is most CEOs still doubt the strength of final demand. The first quarter will be the first time where they start to feel confident about the demand they see. The fourth quarter still has too much of a seasonal element and [they worry that] the inventory rebound could be ephemeral."

Once companies see evidence of new job creation and decide they need to have capacity in place to meet an eventual rise in consumer demand, Herrmann believes CEOs will be more willing to take a chance on offering more constructive guidance for the future. Peter Cardillo, chief market economist at Avalon Partners, senses more enthusiasm among CEOs, based on signs of stronger economic activity ahead. Cardillo expects companies to start providing slightly longer-term earnings estimates, but with guarded outlooks.

Just how strong will earnings be? The weekly outlook published by Thomson Reuters (TRI) on Jan. 8 estimated a 184% increase in profits for the companies in the Standard & Poor's 500-stock index. The highest year-over-year growth rates are expected in financials (up to $2.4 billion, from –$81 billion a year ago), materials (up 163% to $3.0 billion), and consumer discretionary (up 114% to $15.5 billion), while the lowest anticipated growth is in energy (down 24% to $18.5 billion) and industrials (down 13% to $154.8 billion).

Results for the handful of companies that reported in the first week were a mixed bag, however, and didn't inspire uniform confidence for the rest of this earnings season. Technology bellwether Intel (INTC) increased its profits 10 times from a year ago to 40¢ a share, easily beating analyst forecasts, on a 28% jump in revenue. Aluminum producer Alcoa (AA)) narrowed its net loss to 28¢, including restructuring charges, from $1.19 a share a year ago, but missed the consensus outlook for a 6¢ profit. The company's 5.3% drop in revenue, which still beat analyst forecasts by 12%, suggests more rough times for other industrials. JPMorgan Chase's (JPM) earnings of 74¢ a share beat Wall Street's consensus estimate by 13¢ a share, but its $1.82 billion, or 6.7%, revenue miss doesn't bode well for other financials.

The week of Jan. 18 will be a big one for financial earnings, including Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C), while Google (GOOG), American Express (AXP), and General Electric (GE) are also scheduled to report.

The easy comparisons with the fourth quarter of 2008—the worst in index history—make for growth forecasts that border on being ridiculous, says Howard Silverblatt, head of index services at Standard & Poor's (MHP). "Earnings [for the S&P 500] usually tend to be in the $22 [per share] range. They fell all the way to negative 9¢ [a year ago], the only negative ever."

Better Comparison: Q3 2009?

The difference between –9¢ and the $16.09 that S&P estimates for the latest quarter equates to a growth rate above 17,000%, says Silverblatt. For a more practical comparison, he points to S&P 500 earnings of $15.22 in the fourth quarter of 2007, and $21.99 for the last three months of 2006—before the economy began to teeter.