Number One Reason to be Bullish - Earnings

The unofficial kickoff of earnings season was last night when Alcoa ($AA) reported better than expected numbers and helped push stocks higher today.

Even though earnings for the first quarter are not expected to show much of a gain, it is still an improvement and the number one reason I remain bullish on U.S. stocks.

Here are some numbers for you to ponder:

• In 2011 operating earnings for the S&P 500 were $96.44. At current levels the index is trading at a P/E ratio of 14.2, below the historical average of 15.5.
• The estimates are for earnings to increase to $105 in 2012, a 9% increase over last year. Based on 2012 estimates the S&P 500 is currently trading with a P/E ratio of 13.0.
• Year-over-year earnings growth numbers: 2009 +15%, 2010 +50%, 2011 +16%. The 9% increase expected is lower than the last three years and not a stretch.
• Assuming the S&P 500 achieves the earnings of $105 and the index trades at the historical P/E ratio of 15.5, the target for the S&P 500 is 1628 - a new all-time high.
• Now assume there is zero earnings growth for the year and the index is able to trade with a P/E ratio of 15.5, the target would be 1494. That is a gain of 9% from current levels and a fresh four-year high for the index.

Just for good measure I will throw in one more bullish tidbit. There have been 25 times since WWII that the S&P 500 was up both January and February. In all 25 times the index finished the year higher with an average increase of 24%. And, only 2 times did it not have at least a 10% gain for the year.

As of today the index is up 8.8%. If the index reaches the average gain of 24% it will put the S&P 500 at 1558, 18 points from the all-time high of 1576. To reach that goal the S&P 500 must rally another 14% from today's price.