Earnings Time Again

With the second quarter of 2007 now in the books, corporate earnings season is on us once again. The semi-official forecast from Thomson Financial is for S&P 500 companies to collectively show year-over-year earnings growth of 3.9%. This would be a drop from the 1Q growth of 7.9%, which in turn was the first time in 14 quarters that growth was less than 10%. Much depends on how successful corporations have been in manipulating the analysts. The object of the game is to "beat expectations" and the best way to do that is to keep expectations low. We suspect the final number will come in above 3.9% and the market will be pleased. The next two weeks could bring fireworks, however, as some companies are bound to disappoint.

The International Energy Agency (IEA) released a report today supporting the case for higher oil prices. The report said "oil looks extremely tight in five years time," with "prospects of even tighter natural gas markets at the turn of the decade." Though the kidnapped daughter of a British oil worker in Nigeria was returned unharmed, the underlying issues we reported last week have not abated. The market responded bullishly to the news as crude oil closed above $72 a barrel today. Energy service stocks continued to climb, even as Fidelity Select Wireless (FWRLX) captured the #1 spot in our Fidelity Select rankings away from Fidelity Select Energy Service (FSESX). The entire technology sector continues to pick up steam, with semiconductors looking especially strong.

While small-cap and mid-cap benchmarks have similar momentum scores, the small-caps are having a hard time moving above resistance. Growth appears to be gaining a slight advantage over value. This suggests we may finally begin to see some dispersion in the style-based fund rankings after months of little difference. Time will tell.