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Blog: Here's a Good Reason to Hang on to Stocks

Patrick Allen|Senior News Editor, CNBC EMEA
Tuesday, 27 Oct 2009 | 3:45 AM ET

Where is the revenue growth? This is a question we have heard being asked more and more in recent days as investors begin to take a dim view of third quarter earnings that simply beat already lowered earnings forecasts due to cost cutting.

Simply beating the street with profits appears to no longer be enough to boost stocks. Investors want sales to beat if they are going to buy.

Cost-cutting has been very good news for margins across the board over the last 12 months and analysts at Swiss bank Sarasin believe this trend, added to a rebound in revenue growth in the fourth quarter, could be very good news for stocks.

Chief Strategist Philipp Baertschi believes stocks are cheap in historical terms and now expects a V-shaped recovery in earnings. His bullish view is based on his belief that all the costs being stripped out of businesses, when added to a return to revenue growth, will see earnings estimates for 2010 revised upwards.

Philipp points out that since the dotcom bubble burst, CEOs have been cautious with earnings forecasts in a bid not to disappoint the market.

It is always better to beat than miss forecasts - but with companies being so cautious given all the uncertainty many analysts are being caught by surprise by third quarter earnings.

Over 80 percent of the S&P 500 firms that have already reported have beaten earnings forecasts but that figure is far lower when you look at sales.

It is tempting to say the analyst community is not doing its job properly if more than 80 percent of firms are beating forecasts; but like CEOs, no one in the analyst community wants to be too bullish given all the problems facing the global economy.

The positive thing about the fourth quarter of 2009 is that it will be easier to show revenue growth as the year on year comparisons will be far easier to match or beat.

So if you are thinking it is time to get out of stocks given huge gains since March, there could be a good reason to hang on.

The risk to this trade is simple: equities and all other asset classes are no longer being driven by fundamentals but instead by cheap money and leverage. I will have more on that later this week.