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Digesting Earnings: Revenue Growth is Key

It's a busy week ahead for earnings from US Bellwethers and investors will be watching for indications that optimism in the markets is justified by corporate results.

We are fast leaving behind the time that beating earnings because of cost efficiencies is sufficient to justify current multiples. Revenue growth must also return.

No one is looking for a return to revenue numbers from two years ago, but improvement during the last six or 12 months is certainly needed; this outcome would fuel further optimism in the market if these numbers are exceeded.

However, as you listen to the numbers, it's just important to watch for the language used by management.

And don't, for a second, assume that they will be necessarily transparent when they describe what they see the future to be in terms of earnings potential.

Company executives tend to be fairly conservative after a dramatic downturn as evidenced by the earnings calls from Caterpillar over the last two quarters.

Management was extremely gloomy six months ago when discussing future prospects. Now they appear to have evolved to cautious which is a vast psychological improvement. It's no wonder Caterpillar stock has done well the last 6 months - their outlook has become less dire and management was conscious in discussing future prospects.

Caterpillar
Douglas C. Pizac
Caterpillar

With Microsoftreleasing Windows 7 this week, there will be a major impact on technology players in the retail segment if the operating system is adopted widely. Watch for indications from Microsoft that they are beginning to see light in business segments despite last quarter's tough report.

Applereports this week and everyone wonders if iPhone momentum will start to slow. The company has been priced to perfection and at this point that's what's been occurring in the earnings numbers - almost perfection. We shall see this week if that trend continues.

Other companies to monitor include Texas Instruments and 3M. They will both provide a view on the health of the overall economy as both companies fortunes are tied to macro economic growth.

So watch for revenue versus earnings performance, company comments, and future projections about business and industry recovery expectations. The answers to these questions will drive earnings results. And very well could drive market returns.

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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.