- Market Commentary -

March 2, 2010 (FinancialWire) (By Philip Holmes) — Are investors starting to see the recovery as a glass half-empty? There are certainly those who think that downbeat consumer sentiment forecasts in the U.S. and slow demand growth around the world will rule the equity markets. Will investors put more store in Walmart’s (NYSE: WMT) downbeat forecast than AIG’s (NYSE: AIG) exciting unit sale?

BusinessWeek’s Ben Steverman certainly found some who would. In his March 1 piece, “Investors Scorn Bullish Earnings Forecasts,” Ben finds a lot of wariness on the Street. Or is it enthusiasm fatigue?

According to Steverman, “Better-than-expected fourth-quarter earnings haven’t dispelled fears on Wall Street that U.S. companies won’t live up to this year’s high profit expectations.”

But that first part’s a kicker: Ben cites Bloomberg, whose analysts predict that, “large-cap Standard & Poor’s 500-stock index to earn $78 per share in 2010.” If that pans out, it adds up to a “32% gain above 2009 earnings—the highest earnings figure since 2007 and the third highest S&P 500 earnings gain ever.”

So why the gloomy headline? Look at the recent performance of the broad, large-cap index, which has slipped 3.7% since earnings season began on January 11. As Ben points out, “The S&P 500’s price-to-earnings ratio, or P-E, a key measure of how highly investors value stocks, has slipped 5.5%—from 15 to 14.2, based on earnings expected in the next 12 months. That’s the lowest level since April 2009.”

So, companies did well in Q4 2009, but it isn’t looking so good for 2010. Stock values got a little overheated lately, and it will be hard for companies to live up to the values already booked. That view is supported by consumer company CEOs.

Case in point: Walmart, which released its earnings guidance on February 18. The company expects 2010 earnings of $3.90 to $4 per share, which, as Steverman cites, compares “to an average of $3.98 forecast by analysts surveyed by Bloomberg.” This is backed by stats: fourth-quarter consumption in the U.S. has been revised downward, from a 2% increase to a 1.7% increase.

So, brighter corporate earnings forecasts would have to be supported by much stronger consumer sentiment — to a level that would not only spell brisk recovery moving ahead but validate the recovery sentiments already priced into stocks. That’s a tall order, and so far the economic numbers don’t really support that happening.

But, as Steverman says, “If U.S. companies do fulfill those earnings expectations, their stocks will turn out to have been great deals at today’s prices.”

[Go to http://www.financialwire.net/?s=philip+holmes to see more commentaries by Philip Holmes.]

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