"The past 11 quarters mark a full recovery of earnings from their sharp drop in 2001 to their new record highs," says Howard Silverblatt, an equity market analyst at S&P. "While the earnings growth is slowing relative to the prior three years, the forward growth remains steady, in our view, and should again produce record earnings for 2005."
In the first quarter of 2005, S&P estimates earnings gain for the S&P 500 of 9.26%, followed by a 9.01% increase in the second quarter. By the second half of the year, according to S&P forecasts, profit growth will return to its double-digit rates. Growth is estimated at 13.45% for the third quarter and at 11.48% for the fourth.
WELCOME STABILITY. For the full year, earnings expansion should average about 10%. S&P's Investment Policy Committee expects the S&P 500 to close the year at 1,300, which is 9.1% higher than its level on Dec. 31, 2004. For this reason, S&P recommends an asset allocation weighting of 40% U.S. stocks, 20% foreign equities, 15% cash, and 25% in short- to intermediate-term bonds.
Although some critics say the market is currently overvalued, with a price-to-earnings ratio of 15.64 on the S&P 500, S&P analysts disagree (although opinions on individual stocks within the index may differ). Silverblatt points out that p-e's have been significantly reduced from their 2001 highs and now trade slightly lower than their historical 19.9 level.
"When you combine the expected 9.1% market gain and the 10% earnings gain, the S&P 500 p-e ratio should stay fairly stable throughout the year, and stability is a very welcome component in the market," concludes Silverblatt.
ENERGY DRAIN. Within the 10 sectors of the S&P 500, profit growth estimates for 2005 vary widely. The highest growth rate is expected from the materials sector, which, by S&P estimates, should register profit growth of 19.2% in 2005. By contrast, the lowest earnings growth rate is likely to come from consumer discretionary stocks, with growth of 1.53% for 2005.
With consumer spending remaining strong, why would consumer discretionary stocks trail the other sectors? One reason suggested by S&P analysts is high energy prices, which require the average U.S. household to spend more on gas, leaving less money for other discretionary expenditures.
Here's a complete rundown of S&P's forecasts for profit growth in 2005 for each of the 10 S&P sectors:
Estimated Profit Growth for 2005
Piskora is senior editor of Standard & Poor's weekly investing newsletter, The Outlook