S&P 500 Gets 9% Cheaper as Record Profit Restores $3.2 Trillion
By Inyoung Hwang and Lu Wang - Feb 23, 2012 12:01 AM
Profits in the Standard & Poor’s 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 6 points of last year’s peak.
The S&P 500 fell 0.3 percent to 1,357.66 yesterday, trimming a rally since October that has added more than $3.2 trillion to share values, according to data compiled by Bloomberg. While the index is 0.4 percent below the 2011 high of 1,363.61, expanding earnings have pushed the price-earnings ratio to 14 from 15.4 in April.
Economic growth that has been slower than any post- recession period since at least the 1940s is keeping investors from paying more for earnings even after stocks doubled in three years. The best January for the S&P 500 in 15 years has coincided with a decline in New York Stock Exchange trading volume to the lowest level since 1999 and record deposits with investment-grade bond funds.
“The world is profoundly underinvested in U.S. equities,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview on Feb. 21. His firm manages $300 billion. “The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen.”
Topping Estimates
Corporate profits have topped analyst estimates for 12 straight quarters. Analysts that cover companies in the S&P 500 project earnings will rise this year to $104.27 a share, the highest level ever, according to data compiled by Bloomberg. That would represent a 69 percent increase in earnings since 2009, compared with the 22 percent rally in the index in the past two years. Earnings for S&P 500 companies from Priceline.com Inc. to MasterCard Inc. and Lorillard Inc. are estimated to jump 9.6 percent from last year.
The S&P 500 has recovered 24 percent since its low on Oct. 3. Its price-earnings ratio of 14 is near the average level last year and has trailed the five-decade average of 16.4 for the longest stretch since the 13-year period beginning in 1973, according to Bloomberg data.
The S&P 500’s valuation shrank as much as 27 percent in 2011 as S&P stripped the U.S. of its AAA credit rating, President Barack Obama and Congress debated deficit cuts and Europe was forced to bail out Greece. The European Central Bank’s three-year lending program for banks and the Federal Reserve’s pledge to keep benchmark interest rates low through at least 2014 have failed to bolster investor confidence enough to boost valuations.
‘Powerful Recovery’
“The powerful recovery in earnings thus far has allowed market averages to rise without pushing the P/E higher,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a Feb. 21 e-mail. His firm oversees $600 billion. “Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn.”
U.S. gross domestic product expanded an average 2.4 percent a quarter in the 2 1/2 years since the recession ended in 2009, data compiled by Bloomberg show. The world’s largest economy hasn’t had a smaller post-recession recovery rate since at least the 1940s, the data show. In the 2003 bull market, GDP rose 2.7 percent on average, before the S&P 500 surged 102 percent. For the 1982 rally, the rate was 5.7 percent. Equities more than tripled in that cycle.
more @ Bloomberg.com
DO SOMETHING!
| 