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Are stocks finally getting up off the mat? The market's recent performance may provide a clue. On Oct. 10, the first day of a now-four-session rally, the S&P 500-stock index surged 3.6% -- and this time, the advance was likely more than just a short-covering rally brought on by too many down days. The move actually had some fundamental substance supporting it: Yahoo! (YHOO
) and Aetna (AET
) posted better-than-expected operating results, Lexmark (LXK
) offered favorable guidance, General Electric's (GE
) results were in line with expectations, and IBM (IBM
) was upgraded by a major investment bank that expects improving earnings.
Investors, who have grown unused to good news about equities, may now be thinking that things might just be turning around. The second half of 2002, unlike the corresponding period last year, may finally see the recovery in the economy and corporate earnings that so many market watchers had been predicting.
S&P analysts have consistently called for a recovery in operating earnings during 2002, starting in the second quarter. (S&P's operating earnings estimates, as well as year-over-year percent changes, differ from the Street's estimates since no generally accepted formula to compute operating earnings exists. For more information, visit www.spglobal.com.)
GDP GAINS. The table below shows the estimated percentage changes for operating earnings for each sector of the S&P Super 1500 (comprising the S&P 500, S&P MidCap 400, and S&P SmallCap 600), as well as the individual benchmarks. The data are calculated "bottom-up" (analysis that starts with company fundamentals, then works up the "macro" ladder to examinations of industry prospects and finally, general economic conditions).
Since S&P projects a more than 3% advance in real gross domestic product during 2002's second half, we believe that earnings improvements are likely to be led in the third quarter by the economically sensitive consumer-discretionary and materials sectors. In the fourth quarter, energy, industrials, and (if we cross our fingers hard enough) information technology should join the earnings party.
Consumer staples, financials, and health care are projected to show steady but submarket increases in overall earnings. In 2003, all sectors, except utilities, are expected to show improvements in quarterly and year-over-year results.
S&P currently favors 4 of the 10 sectors in the S&P 500: the consumer-discretionary, energy, and materials sectors for their expected turnaround in earnings, and consumer staples for its consistent and transparent earnings stream that will continue to satisfy skeptical investors.
Operating Earnings, by Sector -- S&P 1500
% Changes
2002
2003
Q1A
Q2A
Q3E
Q4E
Year
Q1E
Q2E
Q3E
Q4E
Year
Consumer Discretionary
37
58
72
60
57
23
9
14
11
13
Consumer Staples
16
19
14
6
14
7
6
10
13
9
Energy
-59
-47
-16
56
-31
42
20
30
17
26
Financials
8
10
30
17
16
4
20
16
15
14
Health Care
5
5
6
20
9
16
15
17
15
16
Industrials
-3
7
20
32
13
19
11
18
23
18
Information Technology
NM
NM
NM
166
NM
300
279
91
48
119
Materials
-24
10
49
178
31
92
61
63
65
68
Telecommunication Services
28
153
5
12
29
9
22
3
19
13
Utilities
-10
-17
-11
-1
-10
-10
-5
6
-3
S&P 1500
0
28
34
33
23
21
22
20
19
20
S&P 500
1
29
34
33
24
19
22
18
18
19
S&P 400
-5
10
28
36
17
27
31
26
23
27
S&P 600
-7
25
58
46
27
32
28
30
28
29
A=Actual; E=Estimated; NM=Not Meaningful
Stovall is chief investment strategist for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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Copyright 2002, Bloomberg L.P.
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