PREVIEW-US earnings optimism priced in for investors

* Q1 earnings period to begin Monday with Alcoa

* Recent stock gains could limit earnings’ effect

* Energy sector sees most positive estimate revisions

By Caroline Valetkevitch

NEW YORK, April 10 (Reuters) – The upcoming U.S. earnings
season may not be the time for investors to buy aggressively,
because this year’s winners already reflect earnings
optimism.

The first-quarter reporting period, which begins Monday
with results from aluminum company Alcoa Inc (AA.N: Quote, Profile, Research), follows
three months of solid gains that have brought stocks close to
two-and-half-year highs.

Some gains have been in anticipation of a strong earnings
season, particularly for the energy and other cyclical sectors,
analysts said, raising questions about whether this quarter’s
reports will be enough to keep the recent uptrend intact.

Stocks have been going up “in anticipation of earnings that
are going to be what the real consensus is basically
expecting,” said Ken Fisher, chairman and CEO of Woodside,
California-based Fisher Investments, which manages $43
billion.

Some investors see the rise in energy and other stocks that
benefit when the economy starts to recover as unsustainable and
have been paring back positions.

“We believe commodity inflation is probably near a peak as
is the interest level in many deeper cyclicals” including the
energy sector, said Tom Galvin, managing director and lead
portfolio manager at Columbia Management in Stamford,
Connecticut, which has about $6.5 billion in assets under
management.

Overall, first-quarter earnings for S&P 500 companies are
expected to have increased 11.4 percent from a year earlier,
but that’s down slightly from a forecast of 13 percent on April
1, based on Thomson Reuters data.

Strategists fear higher commodity costs could dampen
results for consumer-related companies as well as those in
industries with heavy fuel costs such as transportation.

Profit margins are expected to drop to 8.13 percent in the
first quarter from 8.41 percent in the fourth quarter,
according to Charles Blood, senior market strategist at Brown
Brothers Harriman.

The energy sector far surpassed other sectors in the first
quarter. The Standard & Poor’s energy sector index (.GSPE: Quote, Profile, Research) was
up 16.3 percent in the quarter, compared with the overall S&P’s
gain of 5.4 percent, and oil prices are at 2 1/2-year highs.

During the fourth-quarter reporting period, the S&P 500
(.SPX: Quote, Profile, Research) gained about 3.6 percent.

Analyst revisions to earnings estimates ahead of the
reporting period support that view that Wall Street is
anticipating strong gains in the energy sector.

Since Jan. 1, the energy sector has been revised up the
most, with its expected growth rate for the quarter rising to
25.9 percent from 11.5 percent, according to Thomson Reuters
data.

On the other end of the spectrum, the telecommunications
sector has been revised down the most, falling to -3.4 percent
from 7.5 percent.

Besides Alcoa, top names reporting next week are JPMorgan
Chase & Co (JPM.N: Quote, Profile, Research), Bank of America Corp (BAC.N: Quote, Profile, Research) and Google Inc
(GOOG.O: Quote, Profile, Research).

Fisher, who sees the market mostly flat this year, said
expectations won’t be exceeded in the upcoming earnings period
as they were in recent quarters.

“Some will shoot the lights out – the obvious $64,000
question is which ones,” he said.

“If you like materials, you’d better be careful which ones.
The easy days of just buying materials and riding it free,
that’s two years old now.”

Others agree that much of the earnings optimism is already
in the market. That may set up a dynamic similar to the fourth
quarter reporting period, when only companies that far
surpassed expectations rose substantially after reporting
results.

“People are very, very cautious about underweighting (the
energy sector) because if you were underweight that sector in
the past couple of quarters, you underperformed,” said Natalie
Trunow, senior vice president and chief investment officer of
equities at Calvert Asset Management Company in Bethesda,
Maryland. It manages about $14.8 billion in assets.

“There is so much optimism around energy, I’m just not sure
that it’s not already priced in, and likewise for materials,”
she said. The S&P materials sector (.GSPM: Quote, Profile, Research) was up 4 percent in
the first quarter.

Some, however, are sticking with the trends that have
worked. Paul Mendelsohn, chief investment strategist at Windham
Financial Services in Charlotte, Vermont, said he recently
added to his gold position. Gold prices have been trading at
all-time highs.

S&P 500 earnings reports have been beating expectations in
recent quarters, with about 70 percent coming in ahead of Wall
Street profit views, compared with roughly 60 percent
typically, Thomson Reuters data showed.

(Reporting by Caroline Valetkevitch; Editing by Andrew
Hay)

PREVIEW-US earnings optimism priced in for investors