Bloomberg News

Stocks Priced for Unlikely 7% Economic Contraction, Chadha Says

October 03, 2011

Oct. 3 (Bloomberg) -- The U.S. economy would have to contract as much as 7 percent to justify current stock prices, according to Deutsche Bank AG’s Binky Chadha.

“If you think about the forward multiple, it’s pricing in a quarter of minus 6 to 7 percent nominal GDP growth, which is pretty severe,” New York-based Chadha, chief U.S. equity strategist, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu today.

The Standard & Poor’s 500 Index fell today within 1 percent of the 20 percent decline that defines a bear market as concern over the Greek debt crisis offset an unexpected rebound in manufacturing and construction spending. The gauge trades for about 12 times reported income and 9.9 times 2012 estimated earnings, according to data compiled by Bloomberg.

The U.S. economy will expand 1.8 percent in the third quarter, according to a Bloomberg survey of economists conducted Sept. 2 to Sept. 7. That’s down from a 2.1 percent estimate in the August survey. Economists also cut growth projections to 2.2 percent for the final three months of this year, from a previous estimate of 2.5 percent.

“That is not a reason for earnings to fall on the face of it,” Chadha said. “Not only is the market pricing in something like Lehman, but it is very much positioned for it.”

The world’s largest economy contracted by 8.9 percent in the last three months of 2008 as the bankruptcy of Lehman Brothers Holdings Inc. pushed the world into the worst financial crisis since the 1930s.

Wall Street firms say S&P 500 profits will increase 17 percent for all of 2011 and 12 percent in 2012. S&P 500 earnings are poised to reach a record $99.16 a share this year, according to the average analyst estimate in a Bloomberg survey. Analysts are more optimistic about earnings since the S&P 500 peaked at a three-year high on April 29, driving their forecast up from $98.73 a share that day.

Chadha estimates the S&P 500 will end 2011 at 1,425, with companies in the index earning $99 a share. The average estimate of 13 strategists calls for the benchmark measure to end 2011 at 1,305. The benchmark equity index slid to 1,099.23 today.

--Editors: Joanna Ossinger, Jeff Sutherland

To contact the reporters on this story: Nikolaj Gammeltoft in New York at; Inyoung Hwang in New York at

To contact the editor responsible for this story: Nick Baker at

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