Earnings Indicators & Comment

My earnings indicators suggest srrong net per share performance for the SP500 well into the first
half of 2011. Unlike 2009 and 2010, costs are rising, especially in recent months. However, top
line or sales increase  measures suggest sufficient strength to offset a rising cost curve and allow
profit margins a degree of further expansion. The one exception continues to be the finance sector
where the major net revenue component -- the spread between what is earned on interest bearing
assets and the cost of funds -- has yet to lift given the flatness evident in banking sector assets.
The offset for financials to flat revenue has been the gradual reduction in reserves for loan losses.

You should note that The Street is reserving the strongest earnings in 2011 for the second half of
the year -- a typical maneuver. Street estimates for Half 1 '11 look easy to beat given the top line
growth momentum which picked up in latter 2010 and is continuing into the current year. For the 12
months ended 6/30/11, SP500 net per share is projected by consensus to be around $89. On my
Market Tracker, that puts SP500 value at 1473, which represents a 15% premium to the current
level. Clearly then, investors remain more cautious on the outlook even with the strong rally up
from the summer 2010 lows.

The issue that stands out the most when one looks at earnings expectations for 2011 is the very
powerful growth expected for sales. And here is where I have been more cautious, since my
top line growth measures are decent but are not in league with the 14%+ gain projected by
The Street. And, with The Street looking for a very strong Half 2 '11 earnings performance, the
sales for SP500 companies are going to have to be especially strong to cover deteriorating cost
structures that are developing.

I would also be remiss if I did not point out that the leading economic indicators I use have been
moving strongly higher over the past 6 months. Although this development is obviously good
news for corporate profits, it bears noting that as an economic recovery becomes well established,
one cannot count on long and strong runs in these indicators and that one should be careful not
to extend hefty run-ups to far out in time.