Bloomberg News

CEO Estimate Cuts Fall 38% With Cheapest S&P 500 Since ’85

September 06, 2011

(Updates today’s trading in second paragraph.)

Sept. 6 (Bloomberg) -- The number of chief executive officers cutting profit forecasts fell 38 percent below average last month, even as the slowing economy pushed valuations to the lowest level at the start of September since 1985.

A total of 138 companies reduced earnings forecasts in August, compared with the average of 221 for the same month since 2000, according to data compiled by Bloomberg. At the same time, the Standard & Poor’s 500 Index slumped 5.7 percent, pushing its price-earnings ratio to 13.3, the data show. The gauge fell 0.7 percent to 1,165.24 at 4 p.m. in New York.

For bears, the lowest multiples since March 2009 show companies will capitulate and lower their estimates, causing the benchmark index for American equities to fall this month, historically the worst for U.S. stocks, according to Bloomberg data since 1928. Bulls say CEOs are the better gauge and that lower multiples, combined with expectations for 15 percent earnings growth this quarter, will make stocks irresistible.

“The bulls would say there’s more resilience,” Jeremy Zirin, who helps oversee $774 billion as New York-based chief U.S. equity strategist at UBS Wealth Management Americas, said in a phone interview on Sept. 1. “Companies aren’t seeing what consumers are seeing. The turmoil in markets and the weakness in some of the data was more of a reflection of policy makers’ inaction or lack of decisiveness both here and in Europe, rather than a true reflection of real economic prospects, which are not great, but also not recessionary.”

Lowe’s, Macy’s

While Lowe’s Cos. cited lower-than-expected sales when cutting its forecast on Aug. 15, Macy’s Inc., Wal-Mart Stores Inc. said revenue is improving and joined 93 other companies in raising earnings estimates. S&P 500 companies exceeded analyst projections for 10 straight quarters, including the 17 percent rise in earnings during the three months ended in June.

Wall Street firms say S&P 500 profits will increase 19 percent for all of 2011 and 12 percent in 2012. Based on next year’s income estimate of $112.32 a share, the S&P 500 is trading for 10.5 times earnings, 36 percent below the five- decade average of 16.4 times results from the prior year, data compiled by Bloomberg show. Based on reported profits, the index trades at 12.8, down from 13.3 on Aug. 31 and the lowest level at the start of September since 1985.

U.S. stocks fell last week as a 2.5 percent drop on Sept. 2 wiped out the S&P 500’s weekly advance after the Labor Department said American employers added no jobs in August. The index had surged 7.2 percent between Aug. 19 and Sept. 1, the most over the same amount of time since September 2009, according to data compiled by Bloomberg.

Budget Debate

The index has fallen four straight months as job creation slowed, reports on manufacturing and the housing market trailed forecasts, Europe’s debt crisis worsened and the debate between President Barack Obama and Congress over the budget deficit spurred S&P to strip the U.S. of its AAA credit rating.

“I just don’t see a single piece of data that’s come out that makes me want to argue there’s a reason to get positive on the inflection point of earnings,” Hayes Miller, who helps oversee $52 billion as head of North America asset allocation at Baring Asset Management Inc., said in a Sept. 1 phone interview from Boston. “Downgrades will be the order of the day.”

Analyst earnings estimates have slowed after forecasts rose for almost two years, data compiled by Bloomberg show. The outlook for profits to rise 19 percent in 2011 compares with an estimate at this date last year for 2010 profits to climb about 35 percent.

Sell in May

Lowe’s, the second-largest U.S. home-improvement retailer, was among the 138 companies that cut estimates last month. The Mooresville, North Carolina-based company said Aug. 15 that profit in fiscal 2011 will be $1.48 to $1.54 a share, less than the previous projection of $1.56 to $1.64, after sales fell 0.3 percent at stores open more than a year. Lowe’s had expected a 2 percent rise in those stores’ sales. The new 2011 forecast was below analysts’ $1.61 a share, Bloomberg data show.

“The macro environment has changed dramatically over the past several weeks,” Chief Financial Officer Robert Hull said in an Aug. 15 conference call with analysts. “We went from worrying about the customer who was stretched by fuel and other inflation to a nation watching the debt-ceiling countdown and now to extremely volatile equity markets.”

The S&P 500 tumbled 9.4 percent from the end of May through August, the ninth-biggest decrease for the three-month period since 1928. Investors returning from summer vacations now face the start of the most volatile period of the year.

Biggest Swings

The Chicago Board Options Exchange Volatility Index, known as the VIX, has posted its biggest two-month swings in September and October, averaging a 26 percentage point change, compared with the average of 18 percentage points, according to data dating back to 1990.

The S&P 500 has declined 1.1 percent on average in September since 1928. It’s one of three months in which stocks have fallen, with the next-closest a 0.2 percent loss in February. Since the bull market began in March 2009, September has produced the biggest gains, averaging 6.2 percent.

“August was not a pretty month for the market,” Leo Grohowski, chief investment officer for BNY Mellon Wealth Management in Boston, said in a telephone interview on Sept. 1. The firm oversees $171 billion. “There’s an awful lot of bad news priced in. Even at our more conservative outlook for corporate earnings, we find the market very attractively valued. CEOs are corroborating this by not guiding us lower.”

Macy’s, Wal-Mart

Macy’s, the second-biggest U.S. department-store chain, beat earnings estimates on Aug. 10 and raised its full-year forecast. The Cincinnati-based company announced earlier in August that same-store sales exceeded projections. Macy’s was 23 percent cheaper than the S&P 500 at the end of August, based on price-earnings ratios, Bloomberg data show.

Wal-Mart, the world’s largest retailer, boosted its profit projections for this year a week later, saying the Sam’s Club wholesale chain helped the company halt a decline in U.S. sales. Earnings and sales for the quarter ended in July beat the average analyst projection, sending the shares up 3.9 percent on Aug. 16. Wal-Mart stock gained 0.9 percent in August, compared with the 5.7 percent loss in the S&P 500.

“You’re not buying U.S. GDP when you’re investing in the equity market,” Charles Reinhard, who helps oversee $1.7 trillion as the New York-based deputy chief investment officer at Morgan Stanley Smith Barney LLC, said in a telephone interview on Sept. 1. “Companies have demonstrated an ability to generate profits despite lackluster growth.”

--With assistance from Jeff Kearns in New York. Editors: Chris Nagi, Nick Baker

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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