“These are giant question marks right now and it’s feeding into these analysts’ estimates,” Tanious said by phone on Dec. 12. “I wouldn’t read into it too negatively. The opportunity moving forward in stocks is going to be multiple expansion, more so than earnings growth. The slowdown in capital expenditures, while it certainly depresses growth expectations, doesn’t mean there aren’t opportunities.”
The S&P 500 trades at 14.4 times profit for the last 12 months, about 12 percent below the average for the past six decades, data compiled by Bloomberg show. Options prices show the most bullish outlook for the S&P 500 in the last two years. Puts with an exercise level 10 percent below the S&P 500 cost 7.52 points more than calls 10 percent above on Dec. 12, the lowest since November 2010, according to data on three-month contracts compiled by Bloomberg.
Three Quarters
Analysts following companies in the S&P 500 estimate that capital spending will decline 1.1 percent from a year ago to $17.2 billion in the second quarter, 0.6 percent to $17.5 billion in the third quarter and 7.4 percent to $18.2 billion in the fourth, according to data compiled by Bloomberg.
The measure has proved to be an accurate indicator for changes in corporate earnings and stock market performance. When CEOs limited expansion in 2009, the S&P 500 tumbled 12 percent to a low of 676.53 on March 9.
Analysts correctly predicted that companies would increase investment after the financial crisis and the deepest recession in seven decades. Spending gained 6.2 percent in 2010, 24 percent in 2011 and 15 percent this year, Bloomberg data show.
Three years of expansion coincided with 10 quarters of S&P 500 earnings growth. Profits for the biggest American companies are estimated by the analysts to reach a record $114.76 a share next year. The U.S. stock rally is poised to reach the average length of bull markets since World War II in April, according to data compiled by Bloomberg.
Differing Outlooks
Forecasts for capital expansion are inconsistent. Manufacturers will boost spending 7.6 percent next year, according to the Institute for Supply Management’s semiannual survey released Dec. 11. The increase is the biggest for any December survey in at least seven years, according to the Tempe, Arizona-based ISM.
A cross-industry survey by the Business Roundtable found more corporate leaders see a slump. About 23 percent of members surveyed said their company’s spending will fall in the next six months, compared with 19 percent in the prior quarter, the Washington-based CEO association said on Dec. 12.