Alec Young, equity market strategist for Standard & Poor’s, told CNBC’s “Squawk Box” that he expects many companies to beat lowered first quarter earnings expectations, but that won’t drive the market higher.
“The market is trading around 15 times (earnings),” Young said Tuesday. “If you beat and come in at 6%, that’s not great for a 15 multiple. It may help the market stay where it is, but to get P/E expansion, I think you need earnings growth closer to double digits.”
Young looks for 7% earnings growth in the S&P 500 this year and 11% in 2008. He doesn’t expect a Fed rate cut to lift the market.
“The problem is rates have been low for several years,” Young said. “So, it’s nothing new. Unless interest rates were to go even lower, which would be a sign of a weaker economy and would be bad for earnings, it’s hard to see interest rates really helping the market.”
He said the S&P Mid-Cap 400 Index is overlooked by many investors and may be a “sweet spot” in the market because it offers the prospect of 14% earnings growth. He said valuations are high, but the strong growth offers an opportunity.
Young said he likes Covance, a company that provides outsourced clinical trials for drug companies, and Trinity Industries, a global infrastructure play.