(Bloomberg News) Analysts are boosting U.S. earnings estimates by the most in a year, a sign to Barton Biggs and Michael Shaoul that stocks will weather the biggest drop in U.S. economic forecasts since 2009.
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 U.S. gross domestic product growth to 2.7 percent from 3.2 percent in March, the data show.
Falling commodity prices and economic data that have trailed forecasts by the widest margin since August sent the S&P 500 down 2.2 percent since its high on April 29. Declines were twice as much in stocks that led last year's rally, the data show. To Traxis Partners LP's Biggs, Kevin Rendino of BlackRock Inc. and Marketfield Asset Management's Shaoul, earnings growth will reverse the losses and extend the index's two-year advance of 97 percent.
"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."
Biggs, who oversees $1.3 billion in New York, favors machinery companies such as Moline, Illinois-based Deere & Co., General Electric Co. in Fairfield, Connecticut, the biggest maker of jet engines, and Peoria, Illinois-based Caterpillar Inc., the largest supplier of earthmoving equipment.
The S&P 500 doubled from its March 2009 low to 1,363.61 on April 29, its highest level since June 5, 2008, as earnings topped estimates for nine straight quarters. Per-share profits in the S&P 500 are forecast to climb 17 percent in the next year after increasing 36 percent in 2010, Bloomberg data show.
"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."
The S&P 500 slipped last week, falling 0.3 percent to 1,333.27, as profit from Dell Inc. that exceeded analyst predictions was offset by a credit downgrade of Greece by Fitch Ratings. Housings starts in the U.S. unexpectedly fell in April as flooding and tornadoes in the South shut down construction, the Commerce Department said May 17.