Bloomberg News

S&P 500 Caps Biggest Gain Since August on Europe Support Pledge

October 10, 2011

Oct. 10 (Bloomberg) -- U.S. stocks advanced, giving the Standard & Poor’s 500 its biggest rally since August, after the leaders of France and Germany pledged a plan to support European banks and stem the region’s debt crisis.

All 10 groups in the S&P 500 advanced. Bank of America Corp. and JPMorgan Chase & Co. added more than 5.2 percent. Chevron Corp. and Alcoa Inc. climbed at least 3.9 percent. Caterpillar Inc. and Boeing Co. increased more than 3.5 percent, pacing gains in companies most-tied to the economy. Sprint Nextel Corp. tumbled 7.9 percent as at least seven analysts cut their ratings after the carrier’s investor meeting.

The S&P 500 advanced 3.4 percent to 1,194.89 at 4 p.m. New York time. It had the biggest rally over five days since March 2009, gaining 8.7 percent. The Dow Jones Industrial Average added 330.06 points, or 3 percent, to 11,433.18. The Russell 2000 Index of small companies surged 4.4 percent. About 6.9 billion shares changed hands on U.S. exchanges as of 4:27 p.m., the lowest volume since Aug. 29, according to Bloomberg data.

“Europe took a very good step,” Peter Jankovskis, who helps manage about $2.2 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “People talk about a Greek default, but the real driver is not what happens to Greece, but what happens to banks that hold its debt. As long as the bank system can survive, it shouldn’t be a big problem.”

The S&P 500 last week rose from the threshold of a bear market on optimism Europe will tame its debt crisis and after American economic data improved. The measure was up 5.6 percent so far this month as gains were led by commodity, consumer discretionary and industrial shares. Before October, the index had fallen for five straight months.

Four-Year Anniversary

Yesterday marked the four-year anniversary of the all-time closing high for the S&P 500 of 1,565.15. The gauge fell 57 percent to a 12-year low in March 2009. Since then, it more than doubled through April 29, 2011. The measure is still down 24 percent from its record high.

The Stoxx Europe 600 Index posted the biggest four-day gain since 2008. German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they will deliver a plan to recapitalize European banks and address the Greek debt crisis by the Nov. 3 Group of 20 summit. Belgium agreed to buy the local consumer-lending unit of Dexia SA, ending a 15-year cross-border experiment with France.

Alcoa, the biggest U.S. aluminum producer will report earnings tomorrow after U.S. markets close, the first company of the Dow to do so for the third quarter. Earnings per share for the S&P 500, excluding financial companies, rose 14 percent in the third quarter, the smallest gain since the end of 2009, analysts’ estimates compiled by Bloomberg show.

‘Strong Earnings Season’

“The earnings season should be a reasonably good one,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. “Are we going to continue to have record earnings? I’d say -- probably not. But it should be a strong earnings season.”

The Morgan Stanley Cyclical Index of companies most-tied to economic growth jumped 4 percent. The Dow Jones Transportation Average increased 3.9 percent. The KBW Bank Index climbed 5.3 percent. Bank of America advanced 6.4 percent to $6.28. JPMorgan rallied 5.2 percent to $32.30. Chevron rose 4 percent to $98.20. Alcoa added 3.9 percent to $10.09. Caterpillar gained 4.8 percent to $79.13. Boeing climbed 3.6 percent to $64.03.

It’s time to “extend risk,” Jonathan Golub, chief U.S. market strategist at UBS AG, wrote in a note today. “As macro concerns subside, stocks which have experienced the greatest price declines are likely to snap back the quickest.”

Most Attractive

Golub said industrial, raw material and energy shares are the most attractively valued. Since the S&P 500 dropped from a three-year high at the end of April, those groups have fallen more than 19 percent. The benchmark gauge has slumped 12 percent during the same period.

Yahoo! Inc. climbed 2.4 percent to $15.84. Alibaba Group Holding Ltd. has talked with Singapore’s Temasek Holdings Pte about providing financing to buy the 40 percent stake in itself held by the U.S. Web portal, according to people familiar with the matter. Yahoo’s stake in Alibaba may be worth about $13 billion, using a valuation by the Singapore investor last month.

Sprint tumbled 7.9 percent to $2.22, extending its two-day decline to 26 percent, the most since November 2008. At its Oct. 7 meeting, the third-largest U.S. mobile carrier said it plans to increase spending to pay for a new wireless network and handsets, and also said it will need to raise capital.

Analyst Changes

Mizuho Securities USA Inc. cut its rating on Sprint to “neutral” from “buy.” JPMorgan, Deutsche Bank AG, Collins Stewart, Kaufman Bros., Atlantic Equities and Raymond James also cut their recommendations.

Netflix Inc. lost 4.8 percent to $111.62, after gaining as much as 9.6 percent earlier. The company retreated from a decision to split its mail-order DVD service from its Internet streaming. “The real cause of the strategy shift could be higher-than-expected customer churn rates in late September and early October,” George Askew, an analyst with Stifel Financial Corp. in Washington, wrote in a note today to investors.

Oppenheimer & Co., HSBC Holdings Plc and Barclays Plc cut estimates for the S&P 500, citing Europe’s debt crisis and U.S. budget battles.

“Against a backdrop of slowing global growth, ongoing sovereign debt issues in Europe, uncertainty regarding U.S. fiscal and regulatory policies and anemic labor market growth, the market is likely to struggle for longer-term gains,” Brian Belski, chief investment strategist at Oppenheimer, wrote in a note dated Oct. 7.

S&P 500 Targets

Belski cut his year-end 2012 forecast for the equity gauge to 1,400 from 1,475 and his profit forecast for next year to $101 a share from $112. He also lifted his projection for earnings this year to $96 from $94. Garry Evans, head of global equity strategy at HSBC, slashed his prediction for the S&P 500’s close in 2011 by 21 percent to 1,130. Barclays’s Barry Knapp reduced his 2011 forecast for the index to 1,260 from 1,326 and his 2012 earnings estimate to $102 from $105.

The S&P 500 climbed above its 50-day average for the first time since July, ending its longest streak below the threshold since 2008 and sending a bullish sign to some analysts who study charts. The benchmark gauge rose above 1,176, its average level during the past 50 days. The index spent the previous 52 days below the average, surpassing the 48-day stretch from May to July of last year, according to data compiled by Bloomberg.

--With assistance from Thomas Black in Monterrey and Lu Wang and Inyoung Hwang in New York. Editors: Jeff Sutherland, Michael P. Regan

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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


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