Stocks: Bullish on First-Quarter Earnings

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Brendan McDermid / Reuters

Traders on the floor of the New York Stock Exchange

S&P 500 stocks are expected to hammer out recovery-charged earnings growth of 37% and a revenue increase of 10% in the first quarter, according to John Butters, director of U.S. earnings research at Thomson Reuters, which tracks analysts' projections.

On the surface, the first-quarter growth appears significantly smaller than the 206% earnings gain posted in the fourth quarter of 2009. However, Butters says much of the fourth quarter's growth was driven by the financial-industry sector, where earnings rose to $550 million, reversing a crippling loss of $81.3 billion a year earlier. If the financial sector was excluded, the fourth-quarter growth would have been 17%, he says. In the first quarter, if financials are excluded, the growth will be 27%, Butters says.

Dirk Van Dijk, chief equity strategist at Zacks Investment Research, also points out that year-over-year earnings growth is actually accelerating, once financials are excluded. "The growth is much more broad-based, spread out among a number of sectors this time around."

Yet how investors define growth is changing as the economy improves. Experts say it's no longer enough to slash overheads, cut staff and make one-off acquisitions in order to prop up earnings. Revenues need to grow too. "People are going to dig much deeper into the quality of the earnings as opposed to just the number itself," says Randy Cass, founder of First Coverage Inc., a financial-services research company. "I think the general notion is that if you can't grow your earnings number through top-line [sales] now, the company still has significant troubles."

Companies that fall short of revenue expectations will likely feel a cold shoulder from the market. Alcoa announced earnings on Monday, posting 10 cents a share, in line with Wall Street projections. But it fell short of revenue expectations and its shares traded off 3% following the news.

Investors will be even more revenue-focused in the new quarter. "The growth rate due to easy [year over year] comparisons will start to fade out starting next quarter," says Butters. "Analysts are looking for anywhere from 20% to 30% growth per quarter for the next three to four quarters, and if we're going to hit those numbers, it's going to be because of solid improvement of sales."