Analysts boosting S&P 500 target 11% reduce earnings growth

Investor Sentiment

“If we were to say people were dipping their toe in the water on the economy a few years ago, now they are mid-thigh,” Joe Kinahan, chief derivatives strategist at TD Ameritrade Holding Corp., said in a July 5 phone interview from Chicago. His firm has $499.3 billion in client assets. “There is every reason to believe that the multiples should also increase.”

After three years of growth, earnings increases are slowing. Income in the S&P 500 advanced an average of 4.3% in each of the last five quarters, compared to the 28% average for 2010 and 2011, Bloomberg data show.

“You will need a strong acceleration of earnings in the third and fourth quarters for the full-year estimates to come through,” Robert Royle, a manager at the North American Trust fund of Smith & Williamson Investment Management LLP, who helps oversee $21 billion in London, said July 2. “You’ll have multiple expansion in an economy that’s not really growing fast enough.”

Slower Growth

U.S. gross domestic product will increase 1.9% this year, down from 2.2% in 2012, according to the median projection of 86 economists. The recovery since the 2009 recession is the slowest since World War II, data compiled by Bloomberg show.

While analysts say profits in the third and fourth quarters will rise 5.5% and 11.2%, respectively, their forecasts usually come down as the reporting season approaches. Since 2009, projections have declined 6.2 percentage points in the six months leading up to a quarter’s end, according to data compiled by Bloomberg.

Lower expectations helped about 73% of the companies in the benchmark measure exceed forecasts by an average of 5.1% for the first three months of the year, according to data compiled by Bloomberg. At the same time, 51% of companies reported sales that trailed estimates.

Lower Bar

Analysts are looking past profit growth this year and predicting improving investor sentiment will push stocks higher. They’ve boosted price estimates for the S&P 500 by 11% from 1,608.50 on Dec. 28, the fastest rate since July 2011, according to data compiled by Bloomberg.

U.S. equity volume, in retreat since 2009, is showing signs of picking up. Trading on all American markets has averaged 6.77 billion shares a day since the start of June, compared with 6.35 billion between January and May and 6.42 billion in 2012, according to data compiled by Bloomberg.

Shares of the three biggest public discount brokerages have rallied an average of 51% this year as individual investors buy and sell more equities. Daily average revenue-generating trades increased an average of 14% in May, compared to a year ago, according to data from Charles Schwab Corp., TD Ameritrade and E*Trade Financial Corp.

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