Birinyi Cuts 2010 Forecast, Says Bull Market Intact

Weakening economic growth will cut returns for the Standard & Poor’s 500 Index this year while failing to end the bull market that started 17 months ago, according to Birinyi Associates Inc.

The benchmark gauge for American equities will probably rise 17 percent from today’s close to 1,225 by year-end, the Westport, Connecticut-based research and money management firm founded by Laszlo Birinyi wrote in a note to clients. Birinyi forecast a rally to 1,325 on March 29.

Declines in companies from Wal-Mart Stores Inc. to Procter & Gamble Co. are unlikely to be erased this year, spurring the lowered forecast, the firm said. Birinyi, one of the first money managers to advise buying stocks before the S&P 500 bottomed in March 2009, has maintained his bullish stance even as the gauge lost 13 percent since April.

“We continue to be optimistic and comfortably so, but also realistic and pragmatic,” according to yesterday’s note. “While we are disappointed that the market’s July rally did not ‘break out,’ our view is still that one can have a respectable year in stocks with some discipline and diligence.”

The new estimate implies a full-year increase of 9.9 percent. There’s a 20 percent chance the S&P 500 will trade in a range of 1,000 to 1,150, buoyed by corporate buybacks and mergers while dragged down by slower economic growth, according to the firm, which oversees about $300 million.

Street View

Wall Street strategists expect the benchmark index to rise 18 percent from today’s close to 1,234, according to the average estimate in a Bloomberg survey. The S&P 500 slipped 0.8 percent to 1,047.22 at 4 p.m. today in New York.

Birinyi said in March, April and this month that the rally that lifted the index as much as 80 percent was too young to end, if history was any guide. The S&P 500 has been in a bull market, commonly defined as a gain of 20 percent or more unbroken by a 20 percent retreat, since March 2009.

The firm sees “no reason for a resurrection” in shares of the biggest American companies. Wal-Mart, the world’s biggest retailer, has fallen 3.6 percent so far this year, while Procter & Gamble, the world’s largest consumer-products company, has dropped 1.6 percent.

Bearish Arguments

The annual return will also be limited because the period for achieving it is narrowing. Reaching 1,220 from the start of 2010 required daily gains of 0.04 percent, compared with 0.16 percent now. Still, Birinyi said, the likelihood of a “significant selloff” is low because valuations already reflect the weakening economy.

“As noted earlier and regularly, we are not convinced by the bearish arguments,” the firm wrote. “We are in a bull market. Our contention is this is a multi-year experience and if we are correct at this point the market is pretty much on track with prior experiences.”

Profit growth among S&P 500 companies may reach 36 percent this year, the fastest since 1988, according to more than 2,000 analysts’ estimates compiled by Bloomberg. Based on that increase, the index is trading at about 12.6 times estimated earnings, the data show.

GDP Growth

Gross domestic product in the U.S. is projected to rise by 3 percent this year and 2.8 percent in 2011, according to the median estimate in a survey of 69 economists this month. The forecast rates were 3.2 percent and 3.1 percent in May.

The S&P 500 declined 1.7 percent on Aug. 19 after the Labor Department said initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, exceeding all estimates of economists surveyed by Bloomberg. Birinyi said growing pessimism on the economy doesn’t necessarily mean stock returns will suffer.

“While joblessness continues and the economy sputters, we would not necessarily ignore, but would instead downplay the vocal economists who say another recession is coming,” the firm wrote. “There is a significant difference between the stock market and the economy. While both may be housed in the same building, they live on different floors.”

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.

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