As Earnings Season Winds Down, Is It Springtime for Stocks?

From Monday's latest reading on manufacturing to key reports on the jobs picture Wednesday and Thursday, speculators should have ample opportunity to make market waves this week. But take a step back for a wider view, and you'll see the major averages enter the final month of the first quarter still negative for the year. And as hard as it is to believe -- what with all their hysterical volatility -- they're pretty much unchanged since October.

As evenly matched as bulls and bears have been for months, earnings season is essentially over, and the flow of economic reports has been supportive, albeit not robustly, of share prices. Those factors, among others, have Tobias Levkovich, chief U.S. equity strategist at Citigroup, increasingly confident that the market could have another 10% to 15% upside from here -- at least until the Federal Reserve pulls the trigger on some kind of rate hike.

"When considering the current earnings environment, one easily could contend that investors have ignored better-than-expected fourth-quarter earnings trends, the probability of even stronger 2010 earnings per share and a rash of positive economic data," Levkovich wrote in a recent report to clients.

A Much-Better-Than-Average Beat Rate

Certainly the earnings picture is clearer now, and perhaps the case for stocks based on valuation is stronger. Fourth-quarter reporting season is all but done, with 481 of the companies in the S&P 500 ($INX) having released their numbers coming into Monday, according to Thomson Reuters. Happily, 72% have beaten Wall Street expectations. To put that in context, the average beat rate since 1994 is 61%, while over the last eight quarters it has jumped to 66% (mostly thanks to fretfully conservative forecasting on the part of sell-side analysts).

At the same time, companies that have surpassed estimates have done so by a very wide margin, with the average upside surprise coming in at 7% compared with an average of 2% dating back to 1994, according to Thomson Reuters. Little wonder there, really, as analysts have been way off with their top-line forecasts, too: 70% of companies have beaten the Street on revenue this earnings season.

Perhaps most important, the market doesn't look particularly expensive based on the latest earnings reports and estimates. The forward price/earnings (P/E) ratio for the S&P 500 stands at 14, putting it at about a 15% discount to its own historical average. The market's forward P/E has also trended down from 14.5 on a 52-week basis, according to Thomson Reuters. So score another point for the bulls.

Dow 12,000 Before Summer?

Anyway, those are the sorts of things that help Levkovich conclude that when it comes to stocks right now, "valuation and implied long-term earnings expectations generate opportunity," at least until the Fed starts to move in earnest to tighten monetary policy.

So, if stocks really do tack on 10% to 15% in the "sharp uptick" Levkovich sees as possible, we could be talking Dow 12,000 by the end of spring. Unfortunately, if the rest of Levkovich's assumptions are correct, once the Fed does its thing, those levels will stick around about as long as spring does, too.