WITH 72 per cent of corporate earnings exceeding analysts’ estimates, it may be difficult for US stocks not to reach a record in 2013.
The Standard & Poor’s 500 Index was 5.1 per cent below the all-time high in October 2007. Profits in the benchmark gauge are forecast to exceed $1 trillion this year, or 31 per cent more than when the gauge peaked, according to more than 11,000 analyst estimates compiled by Bloomberg.
Even if the price- earnings ratio, now 9.8 per cent below the six-decade mean, doesn’t expand, the S&P 500 is poised to recover fully from the financial crisis that began almost six years ago.
In mid January the S&P hit a five-year high as 48 of 67 companies that reported results exceeded analyst estimates in the biggest expansion in profits since the technology bubble of the 1990s. While bears say the rally will stall when forecasts prove too high, bulls say US companies generating more income than ever will push stocks to new records.
“Corporate America has done an incredible job post- recession,” Leo Grohowski, BNY Mellon Wealth Management’s New York-based chief investment officer said in a January 16 phone interview. His firm oversees $179 billion. “It’s not going to be a return to the ’80s and ’90s where we had people retiring from their day jobs to become day traders. I wouldn’t revert to the historic P/E ratio kind of environment. But the good news is I don’t think we need that to reach a record.”
The S&P 500 gained 4.2 per cent in 2013 after advancing 13 per cent in 2012.
Individuals added $3.1 billion to US stock mutual funds in the first week of this year, the most since at least 2000, after withdrawing almost $250 billion in the past four years, according to data from research firm EPFR Global, scarred by the 2008 financial crisis that wiped out $11 trillion in market value.
Total net income in 2013 will be about $241 billion more than in 2007, even after profits had their biggest drop on record in 2000. The price-earnings ratio reached 33 during the peak of the internet bubble in 2000, when earnings were $54.82 a share, according to the data.
“Right now we’re almost double those earnings, yet we are one half the multiple,” Chris Hyzy, who helps oversee about $325 billion as chief investment officer of US Trust in New York, said in a January 16 phone interview. “That to me is a market that is ripe for a new business cycle to come in, and to have a market that tracks profit growth.”
Earnings have bounced back faster than the economy as executives focused on cutting costs and took advantage of record-low borrowing rates. Corporate profits in the 12 months ended July 1, 2012, represented about 11 per cent of US gross domestic product, according to data compiled by the Federal Reserve. That’s the highest since the data began in 1947 and compares with 9.2 per cent in 2007.Corporations flocked to bond sales, driving issuance to a record $1.47 trillion last year, data compiled by Bloomberg show. Yields on debentures from the most creditworthy to the riskiest companies reached an unprecedented low of 3.53 per cent last week, according to the Bank of America Merrill Lynch US Corporate & High Yield Index.“You’re starting from a better fundamental base now, and one that is driven by non-levered economic growth versus 2007,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a January 17 phone interview.His firm oversees $648 billion. “That is a big difference between 2007 and today.”
Growth in profits is slowing after a three-year increase and the market won’t reach a record unless multiples expand, according to Joseph Tanious, a New York-based global market strategist for JPMorgan Funds, which oversees $400 billion. Strategists at Tanious’s firm predict S&P 500 companies will earn $106 to $108 a share this year.
“Consensus estimates are still too high and need to come down,” Tanious said in a phone interview on January 16. “Companies have trimmed all of their fat that they can trim. The big question we have here isn’t so much with earnings, it’s more so with multiple expansion.”
CEOs boosted income by cutting job and costs, driving profitability to record highs. They were also supported by the Federal Reserve, which pledged more bond purchases last year after injecting $2.3 trillion into the financial system and holding the benchmark rate at near zero since December 2008.
Profit margins climbed to 9.1 per cent in September 2011, the highest level in at least 18 years, according to data compiled by Bloomberg on non-financial companies in the S&P 500. While the expansion helped boost earnings amid the slowest recovery from a recession since World War II, it’s unlikely to continue to push earnings higher, Tanious said.
Earnings growth averaged 3.6 per cent per quarter in 2012, compared with 28 per cent the previous two years, data compiled by Bloomberg show.
The US economy will expand 2.8 per cent next year, up from the two per cent forecast for 2013 and greater than the 1.9 per cent in 2007,according to 83 economists surveyed by Bloomberg.—Washington Post/Bloomberg