S&P500 Earnings Set to Surpass 2007 Peak of US$90 a Share in Q3

Published April 5, 2011


Huge corporate profits sustain S&P after rally

S&P500 earnings set to surpass 2007 peak of US$90 a share in Q3

(NEW YORK) The biggest increase in profits in more than a century is telling investors that this is no time to sell stocks, even after the Standard & Poor's 500 Index rallied 97 per cent.

Flying high: Apple has boosted net income to US$16.6 billion from US$7.25 billion in March 2009. The iPad maker is projected to grow net income 54 per cent in its fiscal year ending in September

S&P 500 earnings are poised to surpass the 2007 peak of US$90 a share in the third quarter after surging from US$7 in March 2009, the quickest recovery since at least 1900, according to data from S&P and Yale University's Robert Shiller.

The gap between projected 12-month profits and average earnings over the last 10 years is set to widen the most since 1951, the data show.

PNC Wealth Management, Federated Investors Inc and ING Investment Management, which together oversee about US$1 trillion, say consumer spending will sustain the recovery after government stimulus helped lift profits from the lowest level since the Great Depression.

While earnings will slow in the second half, stock purchases by investors who missed the S&P 500's advance will fuel gains, according to Leuthold Group LLC.

'People are more comfortable with the recovery than at any time over the last couple of years,' said Doug Ramsey, the Minneapolis-based director of research at Leuthold Group, which oversees US$3.9 billion and recommended buying equities four days before the bull market started. 'That's typically when retail investors regain courage', and may spur a rise of up to 25 per cent in the S&P 500 during the next 18 months, he said.

S&P 500 futures expiring in June gained 0.1 per cent at 8.48am in London. The benchmark index rose 1.4 per cent to 1,332.41 last week, bringing its 2011 advance to 6 per cent and putting it 0.8 per cent away from this year's high of 1,343.01 on Feb 18.

It slumped through March 16 following Japan's record earthquake and civil unrest in the Middle East and northern Africa. The gauge's gain since March 9, 2009 is the most over comparable periods since 1937, according to S&P's Howard Silverblatt.

Shares haven't kept up with earnings. S&P 500 companies' 12-month profits are projected to reach a record US$91 a share by August, according to estimates compiled by S&P and Bloomberg.

That would be the highest-ever level on an inflation-adjusted basis and up almost 13-fold from their low two years ago, S&P and Shiller data compiled by Bloomberg show.

The 50-month rebound in profits, following a 92 per cent drop during the global financial crisis, would be faster than the 52 months it took to recover from the bursting of the dot.com bubble in 2000, when earnings fell 55 per cent, the data show.

Profits didn't recoup their 67 per cent tumble during the Great Depression until 19 years later.

American International Group Inc, the New York-based insurer bailed out by US taxpayers, has posted the biggest turnaround since March 2009. AIG swung from a trailing 12-month loss of US$95.8 billion to net income of US$7.79 billion, according to data compiled by Bloomberg.

ConocoPhillips in Houston earned US$11.4 billion last year after losing US$20.3 billion in the 12 months through March 2009, the data show.

Apple Inc has boosted net income to US$16.6 billion from US$7.25 billion in March 2009. The Cupertino, California-based maker of iPads is projected to grow net income 54 per cent in its fiscal year ending in September, data compiled by Bloomberg show.

Apple is set to report second-quarter results on April 20.

The S&P 500 trades for 13.7 times estimated 2011 earnings, compared with an average of 15.7 times reported annual profit since 1900, Shiller data show.

Earnings for the measure will total US$95.21 this year, according to S&P's estimate when adjusted for inflation using the median economist projection for the consumer price index in a Bloomberg survey.

If that forecast is met and the 12-month price-earnings multiple climbs to its mean since 1900, the S&P 500 would rise 12 per cent to end December at 1,494, or 4.7 per cent away from its record of 1,565.15 on Oct 9, 2007. -- Bloomberg