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

Economic Outlook

Economists are growing more optimistic after consumer spending rebounded in May, new home sales climbed more than estimated and durable goods orders beat forecasts. Growth estimates for the July-through-September period rose to 2.3% from 2.2% in May, according to data compiled by Bloomberg. U.S. gross domestic product will expand 2.7% next year, the most since 2006, estimates show.

The Fed may taper its bond purchases, or quantitative easing, if the U.S. economy improves in line with forecasts, Bernanke said June 19. The central bank has been buying $85 billion of bonds as part of an unprecedented stimulus plan after it cut interest rates near zero% December 2008.

While the size of the S&P 500 rally since 2009 is comparable to the gain in the late 1990s during the Internet bubble, valuations are about half as high. Of the 500 companies in the index, 448 stocks trade lower than their price estimates, the most since December, Bloomberg data show.

Analysts boosted price estimates for GameStop 46% this year, even as they slashed second-quarter earnings estimates 80%, according to data compiled by Bloomberg. The largest video-game specialty retailer, based in Grapevine, Texas, trades at 13.6 times earnings in the past year, or 23% less than its average over the last decade.

GameStop Price

“The share price completely looks through this year,” said Michael Pachter, a Los Angeles-based research analyst at Wedbush Securities Inc., said during a July 3 phone interview. He rates the stock the equivalent of a buy and predicts computer game releases in 2014 will fuel gains. “They’re going to have a really big start of the year next year and that should be a big positive.”

Second-quarter profit estimates for Goldman Sachs have fallen 5.4% in 2013 yet forecasts for shares of the Wall Street bank have increased 21%. Shares will rise 5.2% to $161.19 in the next year, bringing its price-earnings ratio to 11.2, or 7.1% higher than today.

Goldman Earnings

“I don’t really care what the company earns in the quarter,” Richard Bove, a bank analyst with Rafferty Capital Markets LLC who estimates the stock will reach $185, said in a July 3 phone interview. “It would appear that in each one of Goldman’s core businesses, underwriting and trading, the outlook over the next couple of years is quite strong.”

Hess Corp., the New York-based energy company, trades 10% below its decade-average multiple of 13. Hess will jump 18% to $80.21 in the next 12 months, up from an earlier forecast for $65.86, according to data compiled by Bloomberg. With second-quarter earnings estimates down 13% from six months ago, the price multiple would expand to 12.8, almost to the historic average.

“We are still going higher,” Phil Orlando, the New York- based chief equity strategist at Federated Investors, which has about $380 billion in assets under management, said by telephone on July 2. “We’re only halfway through the multiple expansion I would expect.”

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