Analysts predict U.S. shares will rise enough this year to boost the Standard & Poor’s 500 Index to a record, even as Wall Street strategists say the best is already over for American equities.
Individual price forecasts for stocks show the combined projection for the benchmark gauge has climbed to 1,569.74, according to more than 10,000 analyst estimates compiled by Bloomberg. That compares with the October 2007 high of 1,565.15. At the same time, strategists who base their predictions on assessments of the economy say this year’s 12 percent rally represents all the gains investors will see.
Bullish forecasts are based on analysts’ expectations that S&P 500 earnings will reach records every year through 2014 as stimulus by the Federal Reserve props up the U.S. economy. More than 70 percent of companies have exceeded estimates with first- quarter results. Bears say Europe’s debt crisis won’t be contained and economic growth will be insufficient to maintain gains that have restored more than $3 trillion to U.S. equities in six months.
“The financial strength of corporate America is stronger than people believe,” Jeffrey Schwarte, a money manager who helps oversee about $258.2 billion in Des Moines, Iowa, at Principal Global Investors, said in a telephone interview on April 25. “We believe earnings ultimately matter.”
Stocks rose last week, pushing the S&P 500 up 1.8 percent to 1,403.36, as earnings topped estimates at Apple Inc. (AAPL), the world’s largest company by market value, and Boeing Co., the biggest aerospace company. Computer and software providers, telecommunications companies and banks and brokerages are topping estimates by more than 10 percent on average, data compiled by Bloomberg show.
The benchmark gauge for American equities has climbed 107 percent since March 2009, pulling within 12 percent of its record high. The measure is up 27 percent after falling to a one-year low Oct. 3 as U.S. unemployment dropped from 9.1 percent to 8.2 percent in seven months. The S&P 500 slipped 0.4 percent to 1,397.91 in New York today.
About 75 percent of the companies in the benchmark measure that reported results since April 10 have exceeded Wall Street earnings projections, beating by an average of 7.1 percent, according to data compiled by Bloomberg. That’s the highest rate in four quarters, the data show. Eight of the 10 groups in the index have delivered income that surpassed projections.
Analysts are signaling that 13 straight quarters of higher- than-expected earnings and record profits through 2014 will help drive the gauge back to its all-time high. Earnings will jump 14 percent to $105.12 a share in 2012, according to analysts’ estimates compiled by Bloomberg.
Record profits have failed to convince strategists that the S&P 500 will advance further. As much as $770 billion was wiped off the values of U.S. equities after the measure peaked on April 2, amid concern over Europe’s debt crisis and slower-than- estimated U.S. jobs growth.
The benchmark index will end this year at 1,384, or 1.4 percent below its close on April 27, according to the average of 11 strategists tracked by Bloomberg. While earnings topped projections, they’ve spurred average post-earnings daily gains of just 1 percent in companies that exceeded estimates. That compares with a five-year average of 1.3 percent, Bloomberg data show.
“When companies beat, their stocks are basically unchanged relative to the market,” Barry Knapp, the New York-based head of equity strategy at Barclays Plc, said in a telephone interview on April 27. “What drives real secular bull markets is multiple expansion. Massive policy uncertainty exists today in both monetary and public policy. Settling those two issues is a necessary condition to have another bull market.”
Knapp says the S&P 500 will fall to 1,330 at the end of the year. Strategists’ mean forecast for the S&P 500 has been below stock analysts’ projection for the index since at least April 1, 2010, according to data compiled by Bloomberg. The spread reached its widest level since then on April 27.
Gina Martin Adams, the New York-based equity strategist for Wells Fargo & Co., said the S&P 500 will fall to 1,360 as the Fed ends its Operation Twist, a plan to swap $400 billion of short-term debt in its portfolio with long-term securities to lengthen the average maturity of its holdings. The federal budget deficit and slowest post-recession expansion since World War II are holding valuations down, she said.
“The market is set up for a little more downside than upside risk, more because of policy reasons than anything,” Adams said in a telephone interview on April 25. “It’s not really an earnings question, but more of a valuation question. Over the last three years in every instance the Fed has finished one of its major programs, stocks have suffered.”
The S&P 500 slid last year to a two-year low of 11.9 times reported profit after the Fed’s second round of quantitative easing ended, Europe’s crisis intensified and American lawmakers debated raising the federal debt limit. While the gauge’s multiple has since rebounded to 14.3, it’s still below the six- decade historical average of 16.4, Bloomberg data show.
Lloyd C. Blankfein, chairman and chief executive officer at Goldman Sachs Group Inc., said he is more optimistic about markets than some economists.
“Gun to my head, I tend to be a little bit more positive than what I’m hearing from other people,” he said during an April 25 interview on Bloomberg Television with Erik Schatzker. “The world is a little bit bifurcated between what economists are saying and what market people are saying.”
FedEx Corp. (FDX), a barometer for the economy because it delivers goods from mobile electronics to pharmaceuticals, may reach $123 a share, surpassing the record $120.97 in February 2007, according to Justin Yagerman, an analyst at Deutsche Bank AG. While European demand remains a risk and has hurt Asian exports, the world’s largest cargo airline is cheaper than five years ago. The Memphis, Tennessee-based company closed at $88.27 last week.
“Slowing European demand has been a risk factor, though commentary anecdotally from companies has been that Europe has probably held up better than expected,” New York-based Yagerman said in a telephone interview on April 25. “We take an optimistic view on global growth over the long term. Over the near term, we’re extremely bullish on domestic U.S. growth and a lot of that’s driven by e-commerce and by pricing.”
Daniela Nedialkova, a London-based analyst for Atlantic Equities LLP, predicts Macy’s Inc. (M) will jump to $51 a share, 9.7 percent above its March 2007 record of $46.51. While annual sales at the department-store operator have slipped 2.1 percent since 2007, the Cincinnati-based company has improved its inventory management systems and product lines in the last five years, she said. Macy’s rallied 5.4 percent last week to $41.19.
“2007 was still very much in the consumer spending boom years,” Nedialkova said in a telephone interview on April 26. “Versus how the company looked in 2007, I think it’s in so much better shape,” she said. “The way I’m modeling sales growth at Macy’s is actually thinking about market-share gains. If the economy actually improved, that would help.”
Gross domestic product in the U.S. will expand 2.3 percent this year, according to the median economist projection, compared with 1.7 percent in 2011 and 3 percent in 2010. Economists forecast the euro area will contract 0.4 percent and China will expand at the slowest pace since 2001.
“The U.S. economy is going to grow faster than people think, so I think we’re going to not have a recession,” Byron Wien, the New York-based vice chairman of the advisory services unit at Blackstone Group LP, the world’s biggest private-equity firm, said in an interview on Bloomberg Television with Tom Keene last week.
The Federal Reserve suggested “growth is going to be better than expected,” Wien said. “Earnings are going to be good.”
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