OK, Everyone Calm Down On Earnings!

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OMG, earnings are only going to grow 1 percent this quarter! We're DOOMED!

The wailing, the gnashing of teeth...really, people, let's everybody keep their shirts on.

Can I ask a stupid question: Where the hell have you all been for the last four years?

Following a massive, 40 percent drop in earnings in 2008, the following three years have simply been boffo. Take a look...

S&P 500 earnings growth (year-over-year):

2009 14.8%
2010 50%
2011 16.1%
2012 (est.) 6.1%

Source: S&P Capital IQ

Good heavens, with gains like this, is it any surprise that earnings growth is slowing?

Want more stats: This is the 10th-straight increase in quarterly earnings.

Why is the growth slowing? Because the law of large numbers starts to take effect, as well as the macro environment: Europe is in recession and will likely be there at least until the third quarter.

You want something to worry about? Don't worry about first-quarter earnings — worry about the fourth quarter! All the expected earnings growth is coming at the end of the year. Here's what the expectations are:

2012 S&P 500 earnings (year over year):

Q1 0.95%
Q2 1.8%
Q3 5.7%
Q4 16.1%

Source: S&P Capital IQ

First, on the concern about just 0.95 percent growth: We usually beat the numbers. So if analysts are expecting one percent growth, we will likely get, say, three percent growth. Not fabulous, but still better.

Look at that fourth-quarter number: The Street is expecting a 16.1 percent increase in earnings in the fourth quarter! Why? Because in the fourth quarter, Europe and Asia are expected to come back onstream.

But going out that far, you sound more like Billy Graham than Ben Graham (as Sam Stovall observed). By that, I mean people use those numbers as placeholders rather than as some hard-and-fast numbers. You're betting that China growth won't go south, that Europe will stabilize, that the U.S. will grow modestly (more than 2 percent gross domestic product ) ... but the outlook is choppy.

Another revelation that seemed to stun everyone: Stocks have rallied in the first quarter while earnings expectations kept dropping?

How could this be? Because valuations were still relatively low going into the year ... remember all that worries about Europe ... well, it wasn't until the end of December that Mario Draghi began giving out 1 percent loans to any bank in Europe that wanted it. That's when things turned around, that's when we started to see some modest multiple expansion on hopes that Europe would get its act together some time in the second half of 2012.

So if it's hard to cost cut our way to earnings growth, and even revenue growth might be tough, what can be done to keep stocks advancing? You can get a multiple expansion, but not without a better macro backdrop.

And if that doesn't impress you, just be grateful for what we have so far, up 11 percent on the year. I ran into at a trader at a social gathering who said, "We made our year in the first quarter."

Indeed: here's a statistic that should cheer you up. According to Sam Stovall at S&P Capital IQ, there have been 25 times since World War II when the S&P 500 index has been up in both January and February. In all 25 times, the market has been up for the full year, the average increase was 24 percent, and only in two of the 25 times did it have sub-10-percent events.

I mean, really ... we are up 11 percent so far this year, and for everyone who is boldly predicting a market correction sometime soon, may I point out that midyear pullbacks or corrections are the norm. The average year-to-date decline in every year since World War II has been a decline of 9 percent from the prior year close, according to S&P Capital IQ.

So for everyone who is panicking, calm down! And for everyone who thinks there might be some type of midyear correction after going straight up for four months...that is NOT a bold call!

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