Wednesday evening marked the unofficial kick-off to earnings season, as Alcoa (NYSE: AA) reported its second-quarter results. While the aluminum producer gave the season a positive send-off (or "less negative," if we're frank), I'm not sure investors will find much cause for celebration as the results come in.

According to an estimate from Standard & Poor's, as reported earnings for the S&P 500 for the second quarter will fall by half year on year, so expectations are already set pretty low. Even so, the market has been grasping at "green straws" of positive economic data, going on a 30.5% run since the March 9 low. Optimism appears to have run its course for now as investors wait for hard earnings data to validate their hopes.

Where does the market stand right now?
Unfortunately, I think these green straws will prove to be either a statistical mirage or a bounce along the path of what will otherwise be a very weak and protracted recovery. If this is the case, how exposed are investors? Let's look at the market's valuation for a clue.

At yesterday's close of 879.56, the S&P 500 is trading just over 15 times average inflation-adjusted earnings for the past ten years. By historical standards, that is slightly cheap -- the average going back to 1881 is 16.3.

However, bear in mind that we are entering a period in which normal growth in the economy is below the historical trend, as the American consumer scales back on purchases in order to repair his/her balance sheet. This will have a knock-on effect, lowering corporate profit growth, which justifies a lower multiple. With that said, I think we should consider that the market is no better than fairly valued. Owning stocks right now isn't a problem -- if one can adopt the appropriate time horizon (7-10 years, no less).

Are there pockets of opportunity and/ or safety?
The two sectors that exhibit the greatest earnings uncertainty, measured by the ratio between the high EPS estimate and the low EPS estimate for 2009 are far and away financials (429%) and materials (312%), followed by energy (179%) and consumer discretionary (184%) in a virtual tie for third place.

All other things equal, earnings uncertainty creates opportunity for investors that have a longer time horizon than most institutional investors (6-12 months). However, patient capital is ineffective unless it is driven by value. In that respect, energy and financials look more attractive than materials and consumer discretionary (as the following table shows).

Energy and financials may not be undervalued as a whole, but they look like rich hunting grounds for experienced stock pickers -- investors with the time and ability to analyze individual names.

(I realize that consumer discretionary is actually cheaper on the basis of its P/E than financials -- I'll come back to why I'm not giving the nod to the former later on.)

2009e EPS*

P/E

Return Since March 9th Market Low

S&P 500

$57.53

15.3

30.5%

Energy

$22.64

15.5

13.1%

Materials

$ 4.74

30.9

34.7%

Industrials

$13.46

13.4

35.8%

Consumer Discretionary

$ 8.82

19.8

38.6%

Consumer Staples

$17.32

13.8

19.4%

Health Care

$26.13

11.5

18.4%

Financials

$ 7.35

20.6

80.6%

Information Technology

$15.70

17.6

38.5%

Telecoms Services

$7.55

13.0

11.2%

Utilities

$11.71

11.7

20.8% Continued...