Despite the weak economy, executives see fatter bottom lines, and there are more optimists than pessimists
More U.S. executives than ever are increasing earnings forecasts compared with those lowering them, a bullish sign for stocks. EBay (EBAY), United Parcel Service (UPS), and 196 other companies raised profit estimates above analysts' projections last month, while 130 companies cut them, the biggest gap since Bloomberg began tracking the data in 1999. The last time executives were this optimistic, stocks climbed 39 percent over the next 3 years. "It's important for the rally...that investors continue to anticipate higher earnings," says Dean Gulis, who manages $3 billion for Loomis Sayles. "That companies themselves are expecting better profits is very positive. As we see rising earnings, we'll see improving stock prices."
About 1.5 U.S. companies boosted earnings estimates above analysts' forecasts for each one that cut projections in October. That's nearly three times the average of 0.59 in the past 10 years, data tracked by Bloomberg show. The ratio fell to a record low of 0.1 in December 2008. After the ratio reached 1.1 in March 2004, the Standard & Poor's 500-stock index rose from 1,126.21 to a record 1,565.15 in October 2007.
Companies are raising the outlook for U.S. profits at the same time the Federal Reserve is trying to boost the economy by purchasing an additional $600 billion in Treasuries. Retail sales climbed in October by the most in seven months, brightening the outlook for holiday shopping even as unemployment holds near 10 percent. Investors are betting profits at S&P 500 companies with the most business outside the U.S. will beat the market. From July 2 through Nov. 12, corporations getting at least 50 percent of their revenue from foreign sources rose about 11 percentage points more than American-focused stocks.
Most companies are earning more than analysts expected. More than 70 percent in the S&P 500 beat profit forecasts in the July-to-September period—the sixth straight quarter that has happened, and the longest streak in Bloomberg data going back to 1993. S&P 500 earnings since Oct. 7 were 6.7 percent higher than analysts predicted, data through Nov. 15 show.
Stock prices may already reflect the outlook for higher corporate earnings. The price-earnings ratio for the companies in the S&P 500 climbed to 15.4 on Nov. 5, based on reported profit from the past year, up from a 14-month low of 13.7 in July, according to data compiled by Bloomberg. "This huge wave of positive guidance has already been priced into the market," says Trym Riksen, chief investment officer for the private banking division of DnB NOR, an Oslo-based firm that oversees about $391 billion. "It would be very surprising if that huge wave were to be prolonged."
The bottom line: Despite the weak economy, corporate executives see big profit increases coming, a sign that bodes well for the stock market.