CIBC World Markets is shifting its U.S. equity portfolio strategy from simple earnings growth to firms with effective restructuring stories, or those with strong revenue growth prospects.

“With 2004 still in its infancy, we anticipate the next thematic shift is potentially under way towards favoring recurring earnings strength,” write analysts Subodh Kumar and Zubeida Mirza in a report released January 2. “We anticipate focus on areas where revenue growth can be expected or where restructuring will result in improved/sustainable earnings growth.”

In early 2003, CIBC’s sector weightings were driven by expectations of double-digit and above consensus earnings growth while we anticipated little risk of further valuation contraction. “For 2004, our S&P 500 operating earnings estimate of 65 (implying 16% growth) are above consensus of 14% growth but we expect strong year-over-year earnings momentum into the first half of 20% to slow to 10% in the second half. We anticipate a further slowing of towards 7.0%-7.5% long-term growth with a potential earnings peak in 2006,” they says.

“Margins are already likely peaking out (at 6.5% for most of 2003 versus historical peaks of around 7%, according to BusinessWeek data). A market shift is likely unfolding away from simple cyclical surprise over earnings being exceeded,” the pair says.

“A longer-term shift in revenue leverage may be away from the decade long U.S. consumer splurge and towards leverage from global recovery and corporate recovery in spending. We anticipate greater focus on areas where revenue growth can be expected to expand further or where restructuring gains can be expected to result in improved sustainable earnings growth.”

“Our growth overweights focus on health care and household/food products where restructuring should yield results. We are now market weight info technology with sub sector rotation in favor of tangible earnings,” the duo concludes. “In cyclicals, we favor industrials and materials over consumer discretionary. Finally, we see energy as an attractive laggard sector in which restructuring has taken place with positive surprise on pricing.”