Earnings Keep Pushing Stocks Higher

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The flurry of second quarter earnings reports is officially underway — aluminum producer Alcoa reported earlier this week that it was back in the black and that things were looking up.  Another positive report came from transport titan CSX, which said that its business was chugging along nicely with 2nd quarter coal shipments up 7%. After Tuesday’s market close, Intel reported quarterly earnings of 51 cents per share, ahead of analysts’ expectations and a nice turnaround from the second quarter of 2009 when the company posted a slight loss after paying hefty fine to the EU. Overall, the early reports in this earnings season are bolstering the market’s sentiment that stocks are too cheap relative to the profit making potential of U.S. companies. The Dow is rapidly adjusting, up more than 6% in July.

David Bianco, chief U.S. equity strategist at BofA Merrill Lynch, expects we’ll be seeing more good numbers from technology companies as well as industrials because that, Bianco notes, is where the economy showed the most improvement during the quarter.  Banks should show improvement too, he says, thanks to declining credit losses. The big wild card, he thinks, is energy, in part because of the BP fiasco.

Overall, Bianco says second quarter numbers should reassure investors that the S&P 500 companies have not only withstood Europe’s sovereign debt crisis but also  the domestic falloff in construction and consumer discretionary spending. These companies are resilient.  Where Bianco thinks Wall Street analysts are too upbeat, though,  is 2011. He believes analysts’ estimates for 2011 could come down 4% or more in the months ahead as the slowing economy forces the number crunchers to trim their forecasts. Will that mean trouble for U.S. stocks?   Don’t bet on it, Bianco says,  because the stock market already prices in a pretty dismal 2011. In fact, between now and year end he expects to see a gangbuster rally  that could take the S&P 500 to 1300, or more than 18% above Tuesday’s close.