(Updates trading in fifth paragraph and prices throughout.)
Oct. 31 (Bloomberg) -- American companies are beating Wall Street profit estimates for the 11th straight quarter, enough to revive a bull market that analysts say will eclipse any rally in the past 12 years.
A total of 222 out of 298 Standard & Poor’s 500 Index companies that reported results since Oct. 11 have exceeded forecasts for the third quarter, according to data compiled by Bloomberg. Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 16 percent to 1,447.93 in a year.
Companies from Google Inc. to Peabody Energy Corp. are delivering higher earnings at a time when Bill Gross, the co- chief investment officer of Pacific Investment Management Co., is warning that Europe’s debt crisis will spur a recession. While more than $6.3 trillion has been erased from global equities since May, analyst forecasts imply the benchmark measure will post its biggest rally since the 1990s technology bubble, when the gain since March 2009 is included.
“This is looking like it’s going to be a really decent quarter,” Warren Koontz, head of U.S. large-cap value stocks at Loomis Sayles & Co. in Boston, which manages about $150 billion, said in an Oct. 25 interview. “Valuations are very, very low relative to history, and you don’t have to make heroic assumptions on multiples to get reasonable returns.”
The S&P 500 traded at 11.7 times reported income on Oct. 3, within 14 percent of its price-earnings ratio at the bottom of the financial crisis in March 2009, Bloomberg data show. The index fell 2.5 percent to 1,253.30 today, trimming its monthly gain to 11 percent, the most since 1991.
Meeting the average price forecasts for each stock would bring the gain since March 2009 to 114 percent. That’s the biggest rally over a comparable period since May 2000, data compiled by Bloomberg show. Before that, the index exceeded the return three times since 1928 -- in the early 1980s and in periods following World War II and the Great Depression.
“I’m not ultra bearish or ultra bullish, but that 1,450 level is attainable,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion in client assets, said in an Oct. 26 telephone interview. “Fundamentals are starting to overcome a great deal of the macro issues at hand, but once the macro issues improve, multiple expansion will occur, which will take you up to your 16- or 15-type multiple,” based on reported earnings, he said.
The advance since Oct. 3 has been led by companies and industries whose earnings are most tied to economic growth. Energy producers and materials companies have rallied more than 20 percent, led by a 56 percent increase Nabors Industries Ltd., an oil driller based in Hamilton, Bermuda, and a 44 percent gain for AK Steel Holding Corp. in West Chester, Ohio. New York-based Morgan Stanley helped send financial firms higher with a 41 percent gain, the data show.
Profits in the benchmark gauge for American equities climbed 19 percent on average in the third quarter, based on results released so far. Earnings are beating predictions by 5.8 percent, compared with an average rate of 8.5 percent since 2008, the data show. Almost 3.1 companies are exceeding forecasts for each that doesn’t, compared with 3 since 2005.
Earnings growth has been “good enough” to resuscitate the rally, said Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees $1 billion. Shaoul’s Marketfield Fund returned 6 percent in the past year, beating 94 percent of its peers, data compiled by Bloomberg show.
“The nice thing about the market going down is that you don’t need to do wonderfully to beat expectations,” Shaoul said in an Oct. 27 phone interview. “It’s very easy to make the argument that large portions of the U.S. equity market give you good value.”
The Citigroup Economic Surprise Index for the U.S. turned positive on Oct. 14 for the first time since April 29, the day the S&P 500 peaked at an almost three-year high. The gauge measures the degree by which economic data are exceeding the median prediction in Bloomberg surveys. Gross domestic product expanded 2.5 percent in the second quarter, almost double the previous period’s rate, the Commerce Department said Oct. 27.
European leaders expanded the region’s bailout fund to 1 trillion euros ($1.4 trillion) last week and agreed on plans to fund banks. They’re trying to prevent a default in Greece, where public debt was 145 percent of GDP last year, higher than any other nation in the region, according to the European Commission. Government bond yields in Italy, Spain and Portugal reached record highs versus German rates this year on concern deficits threaten their solvency.
Gross, the manager of the world’s biggest bond fund, predicted an economic contraction is coming even if European leaders reached a plan to solve the debt crisis. “Recession ahead even if agreement is reached,” he said Oct. 25 on Twitter. “Greek default certain, Portugal/Ireland loom.”
Concern defaults in Europe will spur bank losses and dent economic growth sent the S&P 500 down more than 19 percent between April and October. Declines accelerated after the U.S. was stripped of its AAA credit rating by S&P. The S&P GSCI Total Return Index of commodities has retreated 15 percent from its high on April 8. U.S. Treasuries returned 5.7 percent between April 29, when the S&P 500 peaked, and Oct. 28, according to data compiled by Bank of America Corp.
While policy makers made progress this week, “there’s still a lot that could go wrong with Europe,” Neel Kashkari, Pimco’s head of global equities, said in a phone interview Oct. 27. The U.S. remains at risk for a recession, he said.
A slowing expansion in 2012 will show analysts are too bullish, according to Walter Todd, who helps manage about $950 million at Greenwood Capital in Greenwood, South Carolina. Even with this month’s rally, GDP forecasts are lower than they were earlier this year. In February, two months before the S&P 500 peaked 1,363.61, economists projected 2012 growth of 3.3 percent, according to the average estimate of 80 economists surveyed by Bloomberg. Now, they see a 2 percent expansion.
“The analysts that cover an individual company, their depth of knowledge is a mile deep and an inch wide,” Todd said in an Oct. 26 phone interview. “You can get these situations where the analyst could be right about the fundamentals and everything, but the stock’s never going to reach their price target because of all these other macro factors.”
Rally After Alcoa
The S&P 500 has rallied 4.8 percent since New York-based Alcoa Inc. missed the average estimate for third-quarter profit on Oct. 11. Analysts say 449 companies in the S&P 500, from Peabody Energy to Google, will trade at higher prices a year from now as earnings advance 10 percent in 2012, on average, according to data compiled by Bloomberg.
Peabody in St. Louis and Mountain View, California-based Google beat projections last quarter and analysts expect them to advance at least 23 percent, data compiled by Bloomberg show. Peabody hasn’t missed forecasts since the first quarter of 2009, while Google, the world’s biggest Internet-search company, posted third-quarter income on Oct. 13 that topped expectations by 11 percent as businesses spent more to reach online consumers through advertisements.
“Earnings growth is strong,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in an Oct. 28 phone interview. His firm oversaw $611 billion on Sept. 30. “Once you get that stability on Europe, you could see some expansion of the earnings multiple, and that helped with continued earnings growth makes equities, even now, look rather attractive.”
--With assistance from Rita Nazareth and Inyoung Hwang in New York and Alexis Xydias in London. Editors: Chris Nagi, Nick Baker
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