More Where That Came From

Sure, the energy sector is expected to rock out once more — this time to the tune of 39% earnings growth, according to Thomson First Call. But other sectors won't be wallflowers at this party, analysts say.

"The headline is that it's not just an energy story in the first quarter," says Alec Young, the equity markets strategist at Standard & Poor's. Members of the S&P 500 are expected to deliver year-over-year earnings growth of about 11%, down from 13% a year ago. "To have an 11% overall figure, you need contributions from other areas, and we're seeing that," says Young. "It's fairly broad."

And the final numbers could prove considerably stronger based on the results to date. As of Tuesday afternoon, 43 of the 59 S&P 500 companies reporting had posted an upside surprise, while just four recorded disappointments. That's a landslide ratio of about 11:1. In the strong fourth quarter of 2005, the ratio was closer to 3:1. "It's still very early in the game and you don't want to judge a marathon by the first 200 yards," says Dirk Van Djik, the director of research at Zack's, "but positive surprises are swamping disappointments."

Of course, there is nothing surprising about the energy sector's embarrassment of riches. Oil companies have ridden soaring crude prices and seemingly endless demand all the way to the bank — making a pit stop on Capitol Hill to justify record profits. "Energy still has some legs," says Tina Vital, a global energy analyst with S&P.

Despite its handsome price appreciation in recent years, the sector maintains one of the lowest price-to-earnings ratios around. "The total P/E on the energy sector is only 10.4, versus 15.4 for the S&P 500, based on expected earnings for 2006," says Van Djik. "It's definitely the cheapest sector in the [S&P 500]. The only one that's sort of close is the financials, at 12.2."

But getting black gold out of the ground isn't getting any cheaper, as producers pay up for wages, parts and helicopter fuel. "Lately, the expected growth rate in energy year-over-year, the past couple of weeks, has really come down rather substantially," says Van Dijk. "It's still the highest expected growth rate, but it's down to around the 35% range from around the 55% range. It's mostly due to higher costs — the so-called oil field inflation."

The booms in mergers and commodity trading should help financials cope with shrinking interest margins, though not enough to stop the S&P's largest sector from dragging down the average with modest year-over-year growth of 6%, according to estimates collected by Thomson First Call. Large gains by the largest investment banks will likely be offset by the struggles of regional banking outfits.

Meanwhile, the telecommunications sector is projected to come in a distant but respectable second behind oil, with earnings growth at about 21%, according to Thomson. Information technology is next with expectations for a 17% gain.

And don't underestimate the momentum in materials. "The materials sector is the real big story, in terms of estimate revisions," says Van Dijk. "Over the last month, over four times as many estimates were being raised as being cut." During that period, the average estimate for a materials company's earnings went up 2.65%.

Suppliers of construction materials, gold and aluminum are "still rocking and rolling," says David Dropsey, a research analyst at Thomson. But chemicals producers and steel makers will suffer from unflattering year-over-year comparisons, he adds. Overall, the sector is estimated to average year-over-year growth of about 3%, according to Thomson.

Utilities look weak, too, as long-term interest rates continue to climb, though not as sluggish as consumer staples, where earning growth of just 2% is in the offing. That's a trend that could well continue into the coming year, if softening real estate prices and rising gas costs spook consumers.

"I think you'll see a buildup in capital spending, trying to offset a drop-off in consumer spending," says Van Djik. And that portends more good news for materials, telecoms and techs in Q2.