Earnings Rebound

The folks over at Chart of the Day take a look at current S&P 500 corporate earnings history.

"With first-quarter earnings basically in the books (99% of S&P 500 companies have reported for Q1 2010), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low -- the largest decline on record (the data goes back to 1936). Since its Q1 2009 low, S&P 500 earnings have surged (up over 700%) and currently come in at a level that has only been exceeded during the latter years of the dot-com and credit bubbles."

Comment: Earnings have rebounded but they have to be viewed in the light of the previous cycle's credit shock. Corporate balance sheets {ex financials} were pretty strong back then and are for the most part in better shape now. If we could somehow wipe away the late 2007-early 2009 era, we'd be looking at an earnings decline peak to trough that is closer to what we've seen in other recessions. That's why I'm still optimistic on stocks for the next 12-18 months. Current S&P earnings for this year are in the 79-83 dollar range. Next year I've seen estimates as high as $98 dollars! Now I think that number is going to prove to be too aggressive. Yet if we ratchet that down to say the $93-95 dollar range then stocks are trading at what has been historically seen as cheap levels of valuation.

I'll have more to say on valuation and stocks later this week.

*Long ETFs related to the S&P 500 in client and personal accounts.