The largest U.S. companies are beating the average stock in the Standard & Poor’s 500 Index by the most in more than a decade, fueled by rising dividends, valuations 31 percent below the historical average and fear.
Companies in the S&P 100 from Apple Inc. to Bank of America Corp. have gained 7.7 percent in 2012, compared with 5.1 percent for a version of the S&P 500 that strips out weightings for market value, the widest margin since 1999, data compiled by Bloomberg show. With price-earnings ratios down 6.6 percent this quarter to 12.7 and payouts at 2.2 percent of share prices, analysts raised buy recommendations for the group to the highest level since 2007.
The biggest stocks are showing corporate America’s resilience even though Mitt Romney, the presumptive Republican candidate in this year’s national election, criticized President Barack Obama earlier this month for saying the private sector is “doing fine.” A second year of record profits is helping the S&P 100 beat every developed market index in the world as investors seek the relative safety of the U.S. after $5.1 trillion was erased from global equities since March 27.
“The mega-caps are just cheap compared to other segments of the stock market,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a June 14 phone interview. His firm oversees $3.68 trillion. “There are a lot of things that are wrong in the economy, to state the obvious, and these are companies that have the wherewithal to survive.”
The performance is a reversal of the last three years. The S&P 100, tracking companies with an average market value of $82.2 billion, climbed 77 percent between March 9, 2009, and the end of 2011, compared with 128 percent for the wider index’s average company, which has a market capitalization of $25.5 billion. The measure of larger companies is down 26 percent since the peak of the 1990s Internet rally in March 2000 compared with a 75 percent increase in the equal-weighted index, data compiled by Bloomberg show.
Bigger companies in the S&P 500 last beat the full index by a greater margin in 1999, just as the technology bubble was peaking. At the end of that year, the S&P 500’s 10 largest constituents made up 25.2 percent of the index, compared with less than 21 percent now. The S&P 100 climbed 31 percent and beat the 500-member measure by 11.7 percentage points in 1999, the largest gap since at least 1976, according to data that began that year compiled by Bloomberg.
The S&P 100, which accounts for about half of all American market value, plunged 53 percent from its peak in March 2000 through the bear market low in October 2002, almost 4 percentage points more than the broader index.
Stocks gained last week, with the S&P 100 climbing 1.5 percent to 614.84 and the S&P 500 adding 1.3 percent to 1,342.84 for the second straight advance. The 100-stock index climbed 0.1 percent to 615.29 today, and the S&P 500 advanced 0.1 percent to 1,344.78.
Investors bought shares last week on speculation central banks will take action to stimulate global growth should Europe’s debt crisis spread and before Greek voters prepared for elections that could determine if the nation stays in the euro. Greek election winner Antonis Samaras raced to build a coalition to keep bailout aid flowing after key rival, anti-bailout party Syriza, rejected his offer to join a government.
American shares have rallied as profits beat analyst estimates and forecasts for economic expansion in 2012 rose to 2.2 percent from 2.1 in January, according to the median forecast in a survey of 93 economists. While U.S. shares rose, the Stoxx Europe 600 has slipped 0.1 percent this year and Spain’s IBEX 35 Index is down 22 percent.
The S&P 500 has climbed 22 percent since reaching a one-year low in October and is up 6.8 percent for 2012. It has fallen 5.4 percent since reaching a four-year high of 1,419.04 on April 2. The gauge fell 2.5 percent on June 1 after a disappointing report on American joblessness.
The U.S. added the fewest workers in a year to payrolls last month and the unemployment rate rose, according to the June 1 report from the Labor Department. The Citigroup Economic Surprise Index, which plots U.S. economic data against projections in Bloomberg surveys, dropped to minus 60.6 this month, indicating more economic reports are falling short.
Romney called Obama “detached and out of touch with the American people” after the president said during a White House news conference this month that the private sector was doing fine. Obama later clarified the remark to say it is “absolutely clear” that the economy is struggling.
“We are at an extremely important tipping point here with respect to the U.S.,” said Michael Holland, chairman of New York-based Holland & Co., which oversees more than $4 billion. The stock market is “a factor in our daily lives now, so you can’t avoid it and neither can Romney and Obama,” he said.
While the biggest stocks are winners this year, they performed no better than the broader market when equities tumbled since the financial crisis began. The S&P 100 fell 37 percent in 2008, compared with a 38 percent decline in the S&P 500. The gauge lost 18 percent between April and October 2011, 1.6 percentage point less than the 500-stock index, as the U.S. debt ceiling debate led S&P to cut the country’s credit rating and Europe’s debt crisis spread.
Should Spanish bank bailouts and Greek elections fail to halt the spread of the region’s crisis, even the biggest U.S. companies are vulnerable to another downturn, said Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital in Greenwood, South Carolina.
“A lot of these companies have exposure to Europe and that certainly is a factor to consider,” Todd said in a June 14 phone interview. “Depending on what happens in the market and with Europe, if it doesn’t get resolved, they’ll still get hammered.”
The biggest companies in the S&P 500 derive more business from around the world, getting about 49 percent of sales from outside the Americas, data compiled by Bloomberg show. That compares with the 46 percent for the broader index.
S&P 100 stocks may prove more resilient than their smaller peers during a slower economic expansion because they are more established companies that don’t depend on high-growth markets for their main business. The U.S. advance was led by a 42 percent surge in Apple this year, a rally that boosted its market value by $160.4 billion, more than the individual values of Oracle Corp. and JPMorgan Chase & Co. Bank of America climbed 42 percent, leading financial companies in the S&P 500 to the index’s fourth-biggest advance.
Apple, the Cupertino, California-based maker of iPads and iPhones, and Charlotte, North Carolina-based Bank of America are forecast to earn a combined $53 billion in calendar year 2012, more than the gross domestic product of Costa Rica.
EBay Inc. in San Jose, California, and Seattle-based Amazon.com Inc. have advanced more than 26 percent in 2012 as consumer spending, which makes up about 70 percent of the U.S. economy, rose 0.3 percent in April, according to Commerce Department data. EBay, the largest online marketplace, will boost profit 16 percent this year and next, while Amazon’s earnings will double in 2013, estimates compiled by Bloomberg show.
Dividend yields in the S&P 100 reached 2.3 percent this month, the highest of 2012, while the valuation has declined to 12.7 times annual earnings, 31 percent below the average since 1997. That compares with profit multiples of 28.9 in the Russell 2000 Index of small-cap stocks and 17.2 in the S&P Midcap 400 Index. The large-cap gauge is up almost twice as much as both measures this year.
“We’ve shifted in this lull into big defensive names, after all these concerns about Europe,” Frederic Dickson, who helps oversee about $32 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon, said in a June 13 phone interview. “They’ve continued to deliver and that’s what people want right now.”
Earnings for U.S. companies beat analyst projections for the past two years and are projected to reach records in 2012 and 2013, data compiled by Bloomberg show. While analysts have been boosting their ratings for U.S. stocks of all sizes, they’ve been increasing calls on the biggest at a faster rate. The average rating for the S&P 100 is at the highest level relative to the broader S&P 500 since 2007.
“With risk-off clearly in effect, a focus on the largest stocks around the world is natural,” Adam Parker, Morgan Stanley’s U.S. equity strategist, wrote in a note this month. He’s advising clients to buy stocks with the highest revenue from emerging markets and most cash generation.
The biggest companies have cut debt and costs while boosting profits. Return on common equity, a measure of profitability, for the top stocks reached a record last year, and is about 3 percentage points higher in the 100-stock gauge than the broader index. Free cash flow also reached a new high in 2011, climbing 9.4 percent compared with an 8.1 percent increase for the S&P 500.
“These are the names with the fortress balance sheets,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.7 billion, said in a June 14 phone interview. “They have good growth potential, and they have a lot of financial power and can act independent of any financial crisis that might arise.”