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Big profits, big expectations

By Alexandra Twin, senior writer

NEW YORK (CNNMoney.com) -- A strong first-quarter reporting period is underway, igniting what could be a big year for corporate profit growth.

While Alcoa (AA, Fortune 500)'s report late Monday was mixed, overall results are expected to be strong.

S&P 500 earnings forecasts 2010
Percentage growth estimates by sector
Sector Q1 Q2 Q3 Q4
Consumer discretionary 114 39 18 7
Consumer staples 9 8 8 3
Energy 45 63 39 34
Financials 205 12 69 9467
Health care 3 7 7 14
Industrials 0.2 7 35 11
Materials 177 106 43 39
Technology 49 44 21 6
Telecom -1 -4 2 24
Utilities -4 -2 5 9
S&P 500 37 23 23 32
Source:Thomson Reuters
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Cost-cutting, productivity gains and the easy comparisons to a year ago will all help lift first-quarter results, said Sam Stovall, chief investment strategist at Standard & Poor's.

Looking further ahead, second-, third- and fourth-quarter earnings are also primed for growth.

"Those forecasts are partly a bet on the economy rebounding, but they also reflect an expected return of a period of improving sales," said John Butters, senior analyst at earnings tracker Thomson Reuters.

The 2009 first quarter encompassed the height of the credit crisis. Earnings plunged more than 40%, stocks sank to their lowest levels in more than a decade and worries about a second Great Depression abounded.

Most economists think the recession is now behind us, despite lingering high rates of unemployment and a still hard-hit housing market.

"We're probably about nine months into this recovery, and that growth, combined with low interest rates, should help earnings from a macro standpoint," said Stovall.

First-quarter earnings for the S&P 500 are forecast to jump nearly 37%, when compared with last year's abysmal first quarter, according to Thomson Reuters. Revenue figures should also be up a rosy 10% from a year earlier.

The remainder of the year is expected to continue that trend with double-digit profit growth and single-digit growth for sales.

Revenue figures in the first quarter will also get a boost from a weaker U.S. dollar "since roughly 50% of the revenues of companies in the S&P 500 come from overseas operations," said Stovall.

Although the dollar has managed to carve out some gains recently, the longer-term trend still points to a weaker greenback. That bodes well for energy, tech, consumer staple and industrial firms because those have the most international exposure.

After the close Monday, Alcoa reported a profit versus a year-ago loss, meeting expectations, on higher revenue that missed estimates.

Intel (INTC, Fortune 500) reports on Tuesday. JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500), Google (GOOG, Fortune 500) and others are due later in the week.

First-quarter standouts

The strongest growth will come from financials, materials, and consumer discretionary, which includes autos and retailers, according to current Thomson forecasts. Those three sectors were the main drivers that bolstered the fourth quarter, when S&P earnings gained 206% versus a year ago.

Financials are expected to have a blowout first quarter, gaining 205% versus a year ago. But a lot of that is driven by the easy comparisons with 2009. Revenue is only expected to have risen 1% from a year ago.

Other sectors will fare better. For example, tech earnings are expected to have surged 49% from a year ago with revenue gaining 16%.

"Unlike most other sectors that are benefiting from the weaker comparisons, the growth you're seeing in technology is driven by sales," said Butters.

Consumer discretionary is also primed for a good quarter, due to strength from a number of retailers, which could be seen as yet another indication that consumers are feeling better.

Automakers are helping drive that sector's growth. In particular, Ford Motor (F, Fortune 500) is expected to bounce back notably from a year ago. The automaker is expected to have earned 30 cents per share after posting a loss of 75 cents a share in the first quarter of 2009.

Consumer discretionary as a whole is expected to see an earnings rise of 114% in the first quarter and a 9% jump in revenue.

On the downside, telecom earnings likely fell 1% with flat revenue. Profit from utilities are expected to have dropped 3.5% with revenue gaining a paltry 3%.

Looking forward

The big five leaders of the first-quarter results are expected to maintain dominance through the year. Financials are expected to post small gains in the second quarter, with bigger gains coming in the third and fourth quarters. Materials, consumer discretionary, technology and energy follow a similar trajectory throughout the rest of the year, according to Thomson forecasts.

These sectors are economic leaders, but also tend to depend on reasonably strong economic growth to see strong profit growth.

What could derail the forecasts is a slowdown in the pace of the recovery, particularly as the group that calls economic cycles said Monday that its too early to say if the recession is over.

"There's a question of whether analysts are being too confident," said Butters. "It's going to be key to watch the guidance from the companies and whether the analysts' growth rates start to come down. That's always important, but especially this quarter."

S&P's Stovall said some macro trends to look out for include the direction of the dollar and of Treasury yields. Concerns about Greek debt have driven up the dollar over the last few months. Meanwhile, the yield on the 10-year note hit a nearly 18-month high of 4% recently.

Should yields keep rising, that would increase expenses for companies, pressure the housing market and slow the economic recovery. Meanwhile, economists are not sure what kind of impact the removal of some of the government stimulus will have on the economy.

But even mild economic growth has been a good indication historically that corporate profits can continue to grow.

Stovall looked at earnings growth in the 12 months following the end of a recession. Since 1970, there have been six such examples. Median earnings growth was just short of 7% a year after the recession ended.

Growth was poor in one example - 12 months after the recession ended in March 1991, earnings growth slipped 23%. But in all other cases, post-recession earnings growth was strong, rising one year after the recessions that ended in November 1970, March 1975, July 1980, November 1982 and November 2001.  To top of page

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