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Analyst Estimates 10 Times Higher Than GDP in S&P 500 Rout

Analyst Estimates 10 Times Higher Than U.S. GDP
Traders work on the floor of the New York Stock Exchange in New York, U.S. Photographer: Scott Eells/Bloomberg

Aug. 22 (Bloomberg) -- At a time when U.S. equities have lost $2.9 trillion in market value, stock analysts are twice as bullish as they’ve been over the past 56 years when compared with economists.

Wall Street firms pushed up estimates for Standard & Poor’s 500 Index earnings for a 10th straight quarter, forecasting a 17 percent gain in 2011, data compiled by Bloomberg show. That’s 9.9 times more than economists say gross domestic product will grow. The average ratio since 1954 is 5.4 times, the data show.

The split underscores the skittishness among investors, whose confidence has been shaken by Europe’s debt crisis and the slowing global economy. The S&P 500 is experiencing the biggest swings on record and has lost 18 percent since April 29, dragging its valuation down to 12.3 times earnings, almost the lowest since the bull market began in March 2009. Benchmark indexes in Germany, Brazil and Hong Kong have fallen more than 20 percent from their highs, the common definition of a bear market.

“Everyone’s struggling right now with two questions,” Keith Wirtz, the Cincinnati-based chief investment officer at Fifth Third Asset Management, which oversees $16.7 billion, said in a telephone interview on Aug. 19. “Is there a recession on the horizon, and where will earnings go? There’s a void of information. People are discounting the chances of a recession and what that could mean for earnings.”

Goldman’s Decline

Most U.S. stocks fell today, with 10 dropping for every nine that rose, after Goldman Sachs Group Inc.’s drop in the last 15 minutes of trading wiped out the day’s second S&P 500 rally. The index added less than 0.1 percent to 1,123.82 after climbing 2 percent. The measure has lost 11 percent in 2011.

Stocks tumbled around the world last week as Morgan Stanley said global economic growth is slowing, manufacturing in the Philadelphia region contracted by the most in more than two years, and July existing-home sales unexpectedly decreased. The S&P 500 slid 4.7 percent to 1,123.53, bringing its loss since July 22 to 16 percent, the data show.

The amount wiped off of U.S. equities is more than the value of publicly traded equity in Brazil and India combined, Bloomberg data show.

Bulls say analysts will be vindicated because companies have been able to boost profits when forecasts for economic growth were stagnating in the past. The difference between earnings estimates and GDP projections reached its widest level on record at the time in 1995, the year of the S&P 500’s biggest annual rally since 1958. Per-share income for companies in the index climbed 31 percent that year, and it rallied 34 percent.

Likely Scenario

“If we grow at a moderate pace, earnings will do very well,” David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York, said in a telephone interview on Aug. 19. The most likely scenario is a GDP increase of between 1 percent and 3 percent in the next 12 months, he said. “Earnings like a mild climate like that, and that’s proven very well for companies in the past. Either way, stocks are priced for a recession.”

Bears say it’s only a matter of time before the analysts capitulate and start cutting estimates as the economy slows.

Nick Sargen, of Fort Washington Investment Advisors, predicts a repeat of 2007, when analysts failed to foresee the credit crisis. Four years ago, analysts were expecting 2007 earnings to rise 14 percent. They ended up climbing 1 percent. At the same time, economists had lowered their outlook as much as 0.8 percentage point to 1.9 percent, the lowest level of the year. As the economy contracted in 2008, analysts spent the year ratcheting earnings estimates down 25 percent.

Buffett Vs. Feldman

“Economists started throwing in the towel toward the second half the year, and analysts were late,” Sargen, the chief investment officer at Fort Washington in Cincinnati, said in a telephone interview on Aug. 19. His firm oversees more than $38 billion. “If we’re in for weak growth and this raises the risk of a recession, it’s inevitable that profits will be impacted. The thing I’m most confident of is that analysts will be bringing down their earnings projections.”

The debate was personified this month by Warren Buffett, the billionaire chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc., and Harvard University economics professor Martin Feldstein, a member of the National Bureau of Economic Research that measures recessions.

Buffett said his company spent more on stocks on Aug. 8 than any day this year, when the S&P 500 tumbled 6.7 percent, the most since December 2008. “I like buying on sale,” he said in an Aug. 15 interview with Charlie Rose broadcast on PBS.

Recession Odds

Feldstein, speaking on Bloomberg Television’s “Surveillance Midday” with Tom Keene, estimated on Aug. 2 that there’s a 50 percent chance of a U.S. recession because housing and unemployment aren’t improving.

Profit projections are climbing for companies from Cabot Oil & Gas Corp. to Abercrombie & Fitch Co. after executives increased cash to record levels, lowered debt and cut costs. S&P 500 earnings have exceeded projections by about 7.7 percent each quarter since the bull market began as the index rose as much as 102 percent through April 29, data compiled by Bloomberg show.

Among the 500 companies in the index, 308 have had their average analyst estimate for 2011 profit increased since June 30, Bloomberg data show. That compares with 294 at the same point in the second quarter, when the S&P 500 was reaching its 2011 high of 1,363.61.

Cabot Projection

Cabot’s average projection rose 28 percent since June 30, among the 20 biggest increases in the S&P 500. Since the Houston-based energy producer reported second-quarter results that beat the average estimate by 51 percent, the stock is down 6.2 percent, compared with the 14 percent drop in the S&P 500. Cabot, with the second-biggest gain in the S&P 500 in 2011, may post a 52 percent increase in net income for 2011, the most since 2005, data compiled by Bloomberg show.

“Cabot reported an exceptional quarter both financially and operationally,” wrote Jack Aydin, a New York-based analyst at KeyBanc Capital Markets Inc., who had the highest estimate for second-quarter profit. The company beat his projection when it reported last month. He raised his full-year outlook to $1.49 a share from $1.36.

Analysts have been boosting S&P 500 predictions since 2008, by an average 2.2 percent a quarter, according to data compiled by Bloomberg. The biggest increase was between April and June 2010, when the S&P 500 fell 12 percent. Profit projections climbed 4.3 percent to $81.22 a share. Earnings rose to $84.45 in 2010, a 37 percent annual increase, the most since 1988.

Net Income

Net income has advanced seven straight quarters, climbing 20 percent in the first three months of 2011 and 17 percent in the second, the data show. The gains came as economic growth slowed. Gross domestic product in the first quarter expanded at a 0.4 percent annual rate, compared with 3 percent in 2010.

“Real GDP was about 1 percent, earnings growth for the S&P 500, which is littered with these multinationals, was up in the high teens,” Bob Doll, the chief equity strategist at New York-based BlackRock Inc., which manages $3.66 trillion, said in a Bloomberg Radio interview with Keene on Aug. 17. “The U.S. S&P 500 can do better than the U.S. economy.”

Abercrombie’s net income may jump 85 percent in 2011, fueled by international sales, estimates compiled by Bloomberg show. The New Albany, Ohio-based retail chain is outperforming the S&P 500 by 8.5 percentage points this year as second-quarter revenue from stores abroad increased 74 percent. Robin Murchison, of SunTrust Banks Inc., forecast second-quarter earnings of 34 cents a share, the closest to the 35-cent profit Abercrombie reported. The analyst raised her full-year estimate to $3.16 this month.

‘Best Brand’

“Abercrombie has a very strong balance sheet, and they’ve got one of the best global brand names out there,” Nashville, Tennessee-based Murchison said in a telephone interview on Aug. 18. “World events and the negative rhetoric coming out of DC have created the perception that things are going to get worse from here, which is driving the stock down. But assuming we get some stability in the global environment, Abercrombie will be able to continue to draw sales for the rest of the year.”

The company’s stock has fallen 27 percent from its 2011 high of $77.14 on July 22. It plunged 8.7 percent on Aug. 17 and 9.7 percent on Aug. 18, the biggest two-day slide since 2008, according to data compiled by Bloomberg.

“You have to engage in scenario analysis in a situation like this -- ask yourself what’s the most likely scenario and assign it a probability,” Stephen Wood, who helps oversee $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview on Aug. 19. “For us, we’re still thinking the economy has recovered. Some quarters are better than others, some are worse. For earnings, the American corporates have very strong prospects.”

To contact the reporters on this story: Whitney Kisling in New York at; Inyoung Hwang in New York at

To contact the editor responsible for this story: Nick Baker at

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