For the first time in more than a year analysts are cutting their forecasts for Standard & Poor’s 500 Index earnings, jeopardizing gains from the biggest September rally since World War II.
Estimates for S&P 500 companies’ combined 2011 profit fell as low as $95.17 last month from an August high of $96.16 and posted the first quarterly reduction since the three months ended June 2009, according to more than 8,500 analyst forecasts tracked by Bloomberg. The revision came as the benchmark gauge for U.S. equities rose 8.8 percent last month, the largest September advance since 1939.
Now, money managers at Stifel Nicolaus & Co. and USAA Investment Management Co. are preparing for weaker returns in October as Alcoa Inc.’s Oct. 7 report starts the third-quarter earnings season. Bulls say even with the decline in analyst estimates, equities remain cheaper based on forecast profits than at any time since 1988, excluding the six months after Lehman Brothers Holdings Inc.’s bankruptcy in 2008.
“Earnings forecasts are going to be somewhat more muted in their expectations for future growth,” said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus, which oversees $90 billion. “It’s not necessarily a bad thing, but it’s certainly not the fuel that will reignite animal spirits.”
U.K., Hong Kong
Analysts cut 2011 profit estimates for benchmark stock indexes in 20 of the world’s 24 developed markets last month as U.S. unemployment remains near the highest in 27 years and European lawmakers enact austerity measures to shrink budget deficits. Income forecasts for the FTSE 100 Index of U.K. companies have fallen 4.9 percent since the end of May, while those in Hong Kong’s Hang Seng Index are down 1.5 percent since February, data compiled by Bloomberg show.
Estimates show S&P 500 earnings may rise 15 percent in 2011, down from a forecast of 20 percent growth in March, Bloomberg data show. The S&P 500 slipped 0.2 percent to 1,146.24 last week amid lingering concern that Europe’s government debt crisis may threaten the economic recovery.
The stock index lost 0.8 percent to 1,137.03 at 4 p.m. New York time today. The average analyst estimate for S&P 500 profit in 2011 has rebounded to $95.95 a share, Bloomberg data show.
Alcoa, the first of 30 companies in the Dow Jones Industrial Average to report third-quarter results, may say on Oct. 7 that it earned 6 cents a share in the past three months, according to the average analyst estimate compiled by Bloomberg. That’s 77 percent less than the 28-cent projection in March for the New York-based aluminum producer.
Companies in the S&P 500 may report profits rose 23 percent on average during the third quarter, according to forecasts tracked by Bloomberg. That’s about half the 49 percent growth during the second quarter and the 52 percent increase from January through March.
“You need pretty fancy GDP numbers to get to $95 a share in earnings next year,” said Robert Doll, vice chairman of New York-based BlackRock Inc., which oversees $3.2 trillion. “Our view is that they’re still a little too high, and that nobody believes them.”
Evidence of slowing global growth has led economists to reduce forecasts for U.S. gross domestic product to 2.5 percent in 2010, down from 3.1 percent in May, according to monthly Bloomberg surveys. The world’s largest economy expanded at an annual rate of 5 percent during the fourth quarter of 2009, the most in almost four years. It slowed to 1.7 percent in the second quarter, the Commerce Department said Sept. 30.
Equity strategists that follow broad market and economic trends are less optimistic on the prospects for earnings next year than company analysts. S&P 500 profits may total $87.34 a share in 2011, according to the average of 11 forecasts in a Bloomberg News survey.
Bank of America Corp.’s David Bianco cut his year-end estimate for the S&P 500 to 1,250 from 1,300 on Sept. 22, citing concern the U.S. Congress isn’t likely to extend tax cuts on dividends and capital gains that were enacted during George W. Bush’s presidency. The chief U.S. equity strategist for the Charlotte, North Carolina-based lender predicts S&P 500 companies will earn a total of $90 a share in 2011.
“If analysts are lowering estimates on a broad basis, the market should reflect that,” said Wasif Latif, vice president of equity investments at USAA, which oversees $45 billion in San Antonio. Part of the reason companies beat profit forecasts in prior quarters was because they reduced expenses, he added. “You can only cut costs so much before you start cutting into bone,” Latif said.
More than 70 percent of S&P 500 companies have exceeded the average analyst profit projection for four straight quarters, the longest streak in Bloomberg data going back to 1993.
Changes in earnings projections have historically been correlated with swings in U.S. share prices. The S&P 500 climbed to an all-time high of 1,565.15 on Oct. 9, 2007, and profit projections for the next year peaked about three months later. After the index slumped to a 12-year low in March 2009, the forecasts bottomed out in the following two months, data tracked by Bloomberg show.
While estimates for U.S. corporate profit fell last quarter, they still indicate that firms in the S&P 500 will report record earnings in 2011. The equity benchmark is valued at 12 times projected income for 2011, according to data compiled by Bloomberg. That’s the cheapest level since 1988, excluding October 2008 to March 2009 after New York-based Lehman’s bankruptcy, relative to reported profit from the past 12 months.
‘Equities Are Cheap’
Michael Levine of OppenheimerFunds Inc. says the outlook for lower earnings is already reflected in stock prices after the S&P 500 fell as much as 16 percent between April 23 and July 2. He predicts equity prices will keep rising as investors grow more confident that the U.S. economy isn’t headed for the second recession in three years.
“Equities are cheap,” said Levine, a money manager at New York-based OppenheimerFunds, which oversees about $165 billion. “The broader markets are assuming there’s a slow but gradual recovery. As long as that’s the message, the markets will be fine.”
Marshall & Ilsley Corp. and Vulcan Materials Co. had the biggest reductions in profit estimates for 2011 among S&P 500 companies since June 30.
Marshall & Ilsley, Vulcan
While the projection for Marshall & Ilsley was cut 87 percent since June, the average indicates the Milwaukee-based regional bank will post the biggest jump in earnings -- 102 percent -- since at least 2000 next year. Vulcan Materials, a Birmingham, Alabama-based producer of asphalt and concrete, may grow income by 207 percent, the most in at least a decade, analysts say. Its per-share earnings forecast for 2011 was cut by 75 percent in the past seven months.
Analysts reduced 2011 profit estimates for New York-based Verizon Communications Inc. by 4.5 percent in the past three months to $2.29 a share, according to data compiled by Bloomberg. While shares of the second-largest U.S. phone company have soared 24 percent, the biggest quarterly advance since 2002, projections show income may fall 8 percent this year and rise 4 percent the next.
Forecasts for West Chester, Ohio-based AK Steel Holding Corp.’s income next year dropped 27 percent between July and September to $1.27 a share, data tracked by Bloomberg show. The jump in earnings next year from an estimated 7 cents a share in 2010 would be the biggest since at least 2000. The third-largest U.S. steelmaker by sales predicted an operating loss for the third quarter on Sept. 15 after iron-ore prices increased.
“Stocks go up and they raise their earnings estimates, the markets go down they start reducing estimates -- a lot of it has to do with the psychology,” said Jeff Saut, chief investment strategist at Raymond James & Associates, which manages $235 billion in St. Petersburg, Florida. “Over the long run, investing is indeed all about the earnings, but over the short term it’s all about psychology.”