U.S. Stocks to Gain in 2011 on Earnings, Fed Support, RBC Says

U.S. equities will rise next year as companies continue to boost profits and the Federal Reserve keeps its $600 billion commitment to expanding the economy, RBC Capital Markets said.

The firm raised its rating for industrials stocks and recommends energy, health care and technology companies in the Standard & Poor’s 500 Index, saying it “modestly increased” the portfolio’s economic sensitivity, according to a report today. Combined earnings for the index rise to $88 a share next year, RBC said. For Canadian companies, RBC has an overweight rating on energy, consumer discretionary and telecommunications shares.

“Stabilization in leading global macro data points to an ongoing economic and earnings recovery,” Myles Zyblock, RBC’s Toronto-based chief institutional strategist, wrote in today’s report. “Fundamental growth combined with supportive monetary policy settings will probably carry equities higher.”

U.S. equities have gained as the Federal Reserve said it would buy up to $600 billion of securities through June, marking the second round of quantitative easing since the financial crisis began in 2008. Better-than-estimated earnings also helped the S&P 500 climb 5.9 percent in 2010.

The benchmark gauge for American equities increased 1.6 percent to 1,199.96 as of 9:50 a.m. in New York.

The economic benefits from government spending will fade next year and must be offset by an increase in business spending and an improved jobs market, Zyblock said. A Labor Department report last week showed jobless claims last week fell by 34,000 to 407,000, the lowest level since July 2008.

Beating Estimates

RBC’s S&P 500 earnings forecast equates to a roughly 8.6 percent gain from this year’s $81 a share, according to today’s note. The average estimate among stock analysts is for earnings to increase to $96.53 a share in 2011, Bloomberg data show. About 71 percent of S&P 500 companies beat their earnings estimates last quarter, marking the sixth straight period in which more than 70 percent of companies exceeded forecasts. That’s the longest stretch since at least 1993.

Cost cuts have boosted results in 2010, expanding the average profit margin for companies outside the financial industry to about 11 percent, the highest since 2005, according to data compiled by Bloomberg. Zyblock said that while he expects margins to flatten next year, revenue should grow 6 percent, leading earnings higher.

Risks to expansion next year include the European sovereign debt crisis and the Korean conflict, Zyblock said.

There is “downside acceleration possible on the back of more negative news out of Europe or Korean peninsula,” he wrote. “We recommend that investors maintain a positive strategic bias towards the equity market and tactically add exposure on pullbacks.”

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