Bumper earnings needed to resuscitate rally

By Natsuko Waki

LONDON (Reuters) - The second-quarter corporate earnings that are due to hit the headlines over the next few weeks may have to beat even the most optimistic expectations to prompt investors to seek more equity after a stellar quarter.

The three-month rally in world stocks has stalled in the past week or so on doubts over the strength and sustainability of a global economic recovery, taking the benchmark MSCI index down 6 percent from its early June peak.

And with the quarter as a whole still on course to record the biggest stock price gains in more than 10 years, the temptation to book profits looms large.

What is required to re-ignite the rally is specific -- and ample -- evidence that the economy is generating a self-sustaining rebound and corporate profits are recovering.

Expectations for earnings and profits are still high, even after analysts steadily revised them down last year.

According to ratings agency Standard & Poor's, operating earnings per share of the benchmark U.S. S&P 500 index .SPX are expected to grow by 13 percent to $55.81 in 2009 and a further 33 percent to $74.32 in 2010, having fallen 40 percent to $49.51 in 2008.

According to Thomson Reuters data, quarterly earnings are estimated to drop 34.5 percent for the S&P 500 index for the second quarter -- downgraded from 27 percent growth in July 2008 -- and fall by 21.4 percent in the third quarter.

Come fourth quarter, however, the earnings growth rate is somehow expected to hit a whopping 180.2 percent -- thanks to some impressive optimism about firms selling discretionary consumer goods and material firms.