The same equity analysts who lowered second-quarter profit growth predictions to almost nothing in 2013 are raising price forecasts, convinced the economy is growing fast enough to lure more investors and boost valuations.
Standard & Poor’s 500 Index earnings rose 1.8 percent last quarter, down from a projection of 8.7 percent six months ago, according to more than 11,000 analyst estimates compiled by Bloomberg. At the same time, share-price targets for companies from GameStop Corp. to Goldman Sachs Group Inc. are rising at the fastest rate in two years. The U.S. equity gauge will increase 8.9 percent to a record 1,777.91 should the forecasts prove accurate.
Bulls say expectations for higher valuations show analysts share Federal Reserve Chairman Ben S. Bernanke’s view that the economy may gather enough momentum to expand on its own. Getting to their target would raise the index’s earnings multiple to 16.4, still about 12 percent lower than its 25-year average. Bears say price appreciation without profit gains shows the five-year bull market is fading and declines are inevitable. Second-quarter earnings season begins today.
“There’s a tight relationship between confidence and multiples,” Joseph Tanious, a New York-based global market strategist at JPMorgan Funds, which oversees $400 billion, said by telephone on July 3. “Confidence at these levels, while still depressed, is clearly rising,” he said. “You have an improving U.S. economy albeit at a slow pace.”
Earnings Season
Stocks advanced last week, with the S&P 500 climbing 1.6 percent to 1,631.89 after U.S. employers added 195,000 jobs in June and manufacturing rose more than forecast. While the index has fallen 2.2 percent since the May 21 record, it’s up 14 percent for 2013. Alcoa Inc., the biggest U.S. aluminum producer, is the first Dow Jones Industrial Average company to report quarterly earnings today.
Even as the S&P 500 rallied 60 percent in the last three years, its price-earnings ratio remained below the long-term average of 18.6, according to data compiled by Bloomberg and S&P that begins in 1988. Valuations have held steady as profit growth matched gains in share prices since the bull market began in March 2009.
Reaching analyst price forecasts would send the S&P 500 more than 6.5 percent above the all-time high of 1,669.16 set May 21. Operating profits projected to reach a record $108.40 a share this year would give the index a valuation of 16.4, compared with 17.5 when the market peaked in October 2007.
Investor Sentiment
“If we were to say people were dipping their toe in the water on the economy a few years ago, now they are mid-thigh,” Joe Kinahan, chief derivatives strategist at TD Ameritrade Holding Corp., said in a July 5 phone interview from Chicago. His firm has $499.3 billion in client assets. “There is every reason to believe that the multiples should also increase.”