(Bloomberg) -- Never before have Wall Street stock analysts diverged more with economists at their own firms over the outlook for earnings in the Standard & Poor’s 500 Index. Profits for companies in the S&P 500 will rise 25 percent next year, according to the average estimate of more than 1,500 equity analysts tracked by Bloomberg. That’s 10.9 times faster than the expansion in gross domestic product foreseen by 53 economists surveyed last month. The ratio of income to GDP growth is the highest on record and compares with an average of 6.1, based on data compiled by Bloomberg going back 60 years.
Concern that profits won’t measure up to estimates may limit returns after the S&P 500 rose 50 percent since March, the steepest rally in seven decades. While shares trade close to the cheapest levels relative to earnings since 1989, based on next year’s projections, forecasts for the economy by Goldman Sachs Group Inc.’s Jan Hatzius, Morgan Stanley’s Richard Berner and Bank of America Corp.’s Drew Matus show equities are no bargain. “Earnings are going to be dependent on the overall economic growth,” said Barry James of Xenia, Ohio-based James Investment Research Inc., which oversees $2 billion and whose James Balanced Golden Rainbow Fund beat 98 percent of competitors over the past five years. “While things are not as bad as they have been, we don’t see next year as being one that will go gangbusters.”
Justifying the Rally
The S&P 500 retreated 1.2 percent last week after a report on factory orders and speculation that China would curb bank lending raised doubts about the speed of the economy’s recovery from the first global recession since World War II.
The S&P 500 added 0.9 percent at 9:32 a.m. in New York today after U.S. markets were closed yesterday. Investors are returning from the Labor Day holiday after the benchmark index for American equities rose as much as 52 percent from a 12-year low on March 9 and the proportion of companies that beat analysts’ profit predictions matched a record.
The gains spurred the steepest rise in the S&P 500’s price- earnings ratio since at least the 1950s, pushing the index to 19 times operating earnings from the past 12 months, the most expensive level since 2004, according to data compiled by Bloomberg. Based on analysts’ forecasts for 2010, the S&P 500 trades for 13.5 times income, the lowest since 1989 when compared with the trailing P/E ratio before Lehman Brothers Holdings Inc.’s collapse a year ago.
Too Optimistic
The U.S. economy will expand at a 2.3 percent annual rate next year as the longest recession since the 1930s ends, according to the average estimate of economists surveyed by Bloomberg. U.S. companies are expected to halt a two-year slump in profits next quarter, the longest since the Great Depression, according to analyst projections compiled by Bloomberg. While the individual forecasts may prove accurate, as a whole they are overoptimistic, based on economists’ expectations for U.S. growth.
Sal Tharani, Goldman Sachs’s analyst who covers metal producers, told investors to buy Phoenix-based Freeport-McMoRan Copper & Gold Inc. on Aug. 18, saying in a research note that higher metals prices will help 2010 per-share profits increase 48 percent at the largest publicly traded copper producer. Among the 14 companies he covers, Tharani’s stock picks during the past year have been more profitable than any other analyst’s, according to data compiled by Bloomberg. Tharani was unavailable to comment, said Ed Canaday, a spokesman for the bank.
‘Conviction Buy’
Goldman Sachs, Wall Street’s most profitable investment bank, added Freeport to the “Conviction Buy List” of stocks it expects to rise the most. The firm predicts copper prices will climb 34 percent next year. Futures linked to the metal have doubled in New York trading so far in 2009.
Freeport will have to reach that profit target without the help of an economy expanding faster than about 2 percent next year, according to the growth forecast from Hatzius, Goldman’s New York-based chief U.S. economist. Consumer spending will be weaker than at the end of previous recessions, Hatzius wrote in a Sept. 1 note. He doesn’t have a prediction for earnings growth and declined to comment on analyst estimates in a Sept. 4 interview.
Earnings, GDP
Based on the historical relationship of earnings and GDP compiled by Bloomberg since 1949, the U.S. economy would have to expand by 4.1 percent for profit among S&P 500 companies to match analysts’ prediction for a 25 percent gain in earnings.
The last time S&P 500 profit growth was more than 10 times GDP was in 2002, when earnings climbed 19 percent as the economy expanded 1.8 percent following a recession spurred by the bursting of the Internet bubble. The S&P 500 slid 23 percent that year. The only other year in which earnings grew more than 10 times the economic expansion was 1993. The S&P 500 added 7.1 percent.
The most optimistic forecast in a Bloomberg survey of 53 economists taken from Aug. 5 to Aug. 11 was for a gain of 4 percent, by Michael Darda of MKM Partners LP in Greenwich, Connecticut. The lowest was London-based First Global economist Nikhil Gupta’s call for a 0.5 percent expansion.
Post-War Record
Firings boosted the U.S. unemployment rate to 9.7 percent last month, the highest in 26 years. That brought the number of Americans thrown out of work since the recession began in December 2007 to 6.9 million people.
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