Bloomberg News

Smallest S&P 500 Gain Since 2005 Seen by Equity Strategists

January 11, 2012

(Updates today’s trading in fifth paragraph.)

Jan. 3 (Bloomberg) -- Forecasters at securities firms are more conservative on U.S. stocks than any time in seven years, predicting the Standard & Poor’s 500 Index will rise 6.4 percent in 2012 as budget deficits around the world limit gains.

The benchmark gauge will climb to 1,338 after it was virtually unchanged in 2011 and the U.S. beat every equity market in the developed world except Ireland, according to the average forecast of 13 strategists tracked by Bloomberg. That’s the smallest predicted return since 2005. Adam Parker of Morgan Stanley, whose estimate for 2011 proved the most accurate among current analysts, forecast a loss of 7.2 percent as Europe’s debt crisis will keep volatility above historical levels.

Bulls at Oppenheimer & Co. and Citigroup Inc. say record profits and improving U.S. economic data will propel stocks after the S&P 500 advanced 86 percent since March 2009. Parker and UBS AG’S Jonathan Golub say the prospect of a global slowdown will curb investors’ appetite for equities and keep the rally from gaining momentum.

“The question we pose is, ‘Do you want to be buying it now?’” Golub, the New York-based chief U.S. market strategist at UBS, said in a phone interview on Dec. 29. “A year is a long time. Will there be better entry points than right now? We think the answer is yes.”

Smallest Change

Shares fell last week after an expansion in the European Central Bank’s balance sheet stoked concern the region’s debt crisis will worsen. The S&P 500 lost 0.6 percent to 1,257.60, erasing its 2011 gain and leaving the measure with the smallest price change for any year since 1947. Financial companies led the retreat in 2011, falling 18 percent, and utilities advanced 15 percent. The index rose 1.6 percent to 1,277.06 today.

Golub says the S&P 500 will climb to 1,325 in 2012, the same forecast he gave at the beginning of last year. Credit market conditions, including yields on the 10-year Treasury note that are below 2 percent, are signaling Europe’s crisis may worsen in the first half, slowing earnings growth, he said.

The S&P 500 ended 2011 about 8.3 percent below the 1,371 average strategist estimate from 12 months earlier, data compiled by Bloomberg show. The gap compares with a 13-year average of 7.2 percent and is the biggest miss since 2008, when the index’s 38 percent retreat left it 45 percent below the mean projection. Wall Street firms underestimated the measure’s close by 2.7 percent in 2010 and 3.4 percent in 2009, the data show.

Pared Estimates

Forecasters pared their average 2011 prediction from 1,401 on Aug. 2 after S&P stripped the U.S. of its AAA credit rating, President Barack Obama and Congress struggled over deficit cuts and Europe was forced to bail out Greece. The index moved 1.3 percent a day since April, compared with 50-year average of 0.6 percent before the collapse of Lehman Brothers Holdings Inc.

“Volatility carried the day,” Jeffrey Schwarte, a money manager who helps oversee about $231 billion in Des Moines, Iowa, at Principal Global Investors, said in a telephone interview on Dec. 29. “The market was very top-down, looking at the macro drivers, and assumed everybody’s going to have poor earnings going forward. That’s certainly not the case from our perspective.”

Stock advisers are counting on the same things to spur this year’s gain as they did in 2011: profits that are exceeding analyst estimates, record low interest rates and prospects for an expanding economy. The S&P 500 rallied as much as 102 percent from its low in March 2009.

Stock Valuations

The benchmark index tumbled 19 percent from its April high through Oct. 3 as more than $3 trillion was wiped from U.S. equities. For the year, the S&P 500 traded at an average price- earnings ratio of 14.1, compared with the five-decade mean of 16.4. The measure is trading at 11.6 times forecasts for 2012 profits, with analysts calling for a 9.7 percent gain to $108.38 a share for S&P 500 earnings, the highest level ever.

Earnings multiples will contract in 2012 as investors concerned about the outcome of the U.S. presidential election, growth in China and Europe’s debt crisis refuse to pay more for profits, according to Parker, U.S. equity strategist at Morgan Stanley. Last year’s 5.5 percent gain in the Dow Jones Industrial Average compares with an average of 12 percent in years prior to elections since the measure’s creation in 1896, data compiled by Bloomberg show.

“You don’t want to pay a higher multiple for today’s earnings knowing that there’s this negative skew as to what can happen,” he said in a telephone interview on Dec. 28. “About half of getting a stock right these days seems to come from bottom-up issues and half seems to come from macro issues.”

Profit Estimates

Parker predicted at the beginning of 2011 the S&P 500 would end the year at 1,238, 1.6 percent from the close. His forecast was the lowest in a survey of 12 strategists’ estimates compiled by Bloomberg and compared with the average projection of 1,371. In a report to investors dated yesterday, he wrote the benchmark will close the year at 1,167. His forecast isn’t included in the average of 12 strategist calls by Bloomberg.

Bulls say rising profits mean the S&P 500’s earnings yield will expand, fueling gains in prices. Strategists are more pessimistic than equity analysts about how much earnings will climb in 2012, forecasting $102.31 a share. That would still represent the highest level ever.

Brian Belski, Oppenheimer & Co.’s New York-based chief investment strategist, said he’s never seen investors more influenced by the economy and government than now. That’s a bullish signal because it means there are more people who may change their minds and buy stocks in 2012, he said.

Equity Bull Market

Belski says the S&P 500 will climb 11 percent to 1,400 in 2012. He forecast the index would rise 5.4 percent last year to 1,325. When he gave his prediction, the average strategist projection for the end of 2011 was 1,379, according to Bloomberg data.

“We’re at the cusp of the next great equity bull market,” Belski said in a telephone interview on Dec. 28. “The U.S. is not just the best house in a bad neighborhood anymore. It’s the best house period. This has all been led by the structural change that corporate America has undergone in the last 10 years.”

The S&P 500 had the tenth-best performance in 2011 among the world’s stock markets. China’s Shanghai Stock Exchange Composite Index and Brazil’s Bovespa slumped 22 percent and 18 percent respectively. Japan’s Topix lost 19 percent, while the DAX Index of German stocks erased 15 percent. Ireland’s ISEQ Overall Index climbed 0.6 percent, the only benchmark to beat the S&P 500 among 24 developed markets.

Corporate Cash

Companies built reserves as stocks sank and forecasts for growth in U.S. gross domestic product in 2012 slipped from 3.3 percent in February to as low as 2 percent in October. Cash at companies excluding banks, utilities, truckers and automakers rose to a record $998.9 billion in the third quarter, according to S&P.

Low investor expectations for earnings growth will help stocks rise when companies beat estimates, Citigroup’s Tobias Levkovich said in a Dec. 27 interview on Bloomberg Television’s “Street Smart.” He said in a Dec. 30 report that the S&P 500 will climb to 1,425 in 2012.

S&P 500 companies have beaten Wall Street profit estimates for 11 straight quarters. An average of 73 percent of corporations in the index exceeded analysts’ estimates in the first three quarters of 2011, with earnings-per-share topping projections by 5.3 percent, according to data compiled by Bloomberg.

“Markets are going to be moving higher,” Levkovich, the New York-based chief U.S. equity strategist at Citigroup, said. Clients who are money managers speculate earnings in 2012 will be about $95 a share, he said. “So if it’s comes in at about $100, that’s better than what investors believe.”

--With assistance from Whitney Kisling in New York. Editors: Chris Nagi, Michael P. Regan

To contact the reporter on this story: 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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