How Were 2nd Quarter Earnings?

Focus: STOCKS

Jack Ablin Image Jack Ablin CIO & Executive Vice President, BMO Private Bank

Seasoned investor Jack Ablin analyzes the second quarter earnings with some cautionary thoughts for both earnings and revenue projections going forward.

SPEAKER:  Hi, my guest today is Jack Ablin.  Hi, Jack and thank you so much for being with us. 

JACK ABLIN:  My pleasure. 

SPEAKER:  You know the second quarter earnings were not too bad, about 72% of the S&P 500 companies actually beat expectations. 

JACK ABLIN:  That is true, but every quarter 72% of companies beat expectations.

SPEAKER:  But it used to only be 60 some.

JACK ABLIN:  I am not really impressed by that number; in fact, I found that earnings, mind you, were not that great.  In fact, revenues were barely…

SPEAKER:  Not as good.

JACK ABLIN:  …2% or so.  In fact, if you take financials out of the earnings equation, earnings would have been down 2%, so no I did not look at second quarter earnings and say that this was something I want to jump on the bandwagon for.  Then looking out two quarters, it is remarkable to me that analysts are expecting 10% earnings growth for the whole year 2013 on about less than 1% revenue growth, which suggests to me that they expect all of their companies to expand their margins, do perhaps what Cisco is doing and that is…

SPEAKER:  What, laying off?

JACK ABLIN:  …laying off people.  I do not see that as a recipe for growth in the future.  No, we need to ratchet back expectations.  The market has gone a long way; we need fundamentals to catch up.  I think they will, but I think we could be trading sideways for a while as earnings and revenues start to keep pace with that current expectation.

SPEAKER:  Do you think there will be much volatility within those sideways movements?

JACK ABLIN:  It could be, especially in the backdrop we are seeing interest rates rise.  Fair value for the 10-year Treasury in our view is about 3.5% and we are at about 2.8% now, so yeah, there could be some turbulence.  I also think that if you strip it away, look at earnings and the run rate of earnings and revenues, that fair value is maybe 7% or 8% below where we are today, so I am not looking for a bear market, perhaps a correction, but not enough to really get out of the way and go to cash.

SPEAKER:  What about sector-wise?  Do you have any favorites now that you think are going to outperform?

JACK ABLIN:  Sure.  Our favorite sectors for the year are financials, health care, consumer staples and consumer discretionary and I will say financial probably very well positioned to do well in this interest rate environment, because what the Fed is really trying to do is steepen the yield curve, increase the spread between overnight paper and the 10-year.  If that happens, it creates a much more favorable environment for lending and much more favorable profit environment for banks.  I would say on our view banks are probably 15% cheap relative to their peers.