Monday, May 23, 2011

Stat of the Day: SP500 Earnings Estimates Soar

As the market crashes and especially the global growth stocks, earnings estimates for SP500 stocks continue to climb into record territory. Profits are now forecast to reach $104.73 in the next 12 months, according to data compiled by Bloomberg. Some analysts are even forecasting $112 for 2012.

Whats amazing about these data points is that the four-week increase in earnings on May 2nd represented the biggest gain since May 2010. Oddly that was the same period where the market sold off in 2010. The inverse correlation between raising earnings and the market selling off seems backwards, but we've now seen it 2 years in a row. Last year was a buying opportunity and this year could easily follow.

If the market were to hit those earnings numbers around $104 and trade at the historical PE multiple around 15, the SP500 would reach over 1,600. Today the market sunk over 1% on Greece debt fears and global growth concerns after weak PMI data out of China and Germany providing a great entry point around these levels of 1,317 on the SP500.

Clearly those economic issues are concerning, but the market needs to step back and consider the benefits from declining commodities that were pushing inflation into unacceptable levels in the emerging world. The 10 month low in China PMI likely allows them to cut back on interest rate hikes and possibly even stop. Not to mention that a good part of the weakness in the manufacturing sector has been the delayed impact from the Japanese destruction that led to a sharp reduction in production of parts needed around the world. That issue will resolve itself over the summer reinvigorating growth.

Is global growth dead? According to Barton Biggs and others vis this Bloomberg article, the market is overreacting to issues that will be resolved and allow the market to move higher. Earnings will support the market along with low interest rates. As inflation moderates over the summer, watch for emerging markets like China, Brazil, and India to return into favor. After all, growth hasn't really slowed in those countries, it has been the fear that inflation would eventually slow growth. The retreat in the market was just what the markets needed.


  • Standard & Poor’s 500 Index profits may reach $104.73 a share in the next 12 months as consumer demand pushes sales up 13 percent, according to data from about 9,000 analysts compiled by Bloomberg. 
  • The income estimate rose 2.8 percent in the four weeks ended May 2. Analysts are turning more optimistic as economists cut projections for 2011 
  • Analysts have raised forecasts for S&P 500 earnings during the next 12 months each month this year, according to average projections compiled by Bloomberg. They expect companies in the benchmark gauge to earn $104.73 a share, up from $96.92 forecast at the beginning of January, the data show. The four-week increase on May 2 represented the biggest gain since May 2010, data compiled by Bloomberg show.
  • “Investors are overreacting,” said Biggs, citing concerns about the European debt crisis, housing and reduced stimulus from the U.S. Federal Reserve. “All those worries are true, but I can see a number of them will be resolved in the next two months, and I do not think the global economy will slow down significantly. Stocks are very reasonably priced on earnings for next year.”
  • “Companies have executed,” said Rendino of BlackRock, which oversees $3.64 trillion in New York. “Each quarter there seems to be an abundance of bears saying, ‘This is as good as it gets,’ and the quarter after that, it’s even better. It’s emblematic of the fact that U.S. corporations have executed quite brilliantly through this cycle. Stocks are cheap.”

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