Jan Hatzius' recent downgrade of the US economy, and the subsequent downgrade of the S&P by such formerly gruntled optimists as Goldman's David Kostin, has completely failed to register with permabullnut gallery. Case in point: the Bank of America strategist who was supposed to replace David Rosenberg, yet has become his own satirist caricature, David Bianco, has decided to go completely the other way, by actually rising not only his 2010 S&P estimates, but also 2011, and even, hilariously, 2012, this despite other such landed economist Ph.D's (from reputable institutions) as the San Fran Fed warning that there is a "significant" risk of a double dip in 2 years (yes, that's the Fed warning about a re-recession, not some rational, realistic, coherent human being), thus once again proving that his true worth is whatever CNBC pays him for his daily appearances in the Cheerleader Session block (which has now dropped out of Nielsen tracking due to complete lack of public interest in vapid propaganda). And for those who claim idiocy can not be captures in words, we disagree. To wit "Some dismiss our target because a deflationary shock could collapse current EPS. Others argue that EPS will be flat for years. We disagree; we think exceptionally low interest rates support real estate values and EPS will grow through foreign investment. The S&P has the best of the DM and EM world, low rates and healthy growth." Speechlessness ensues. What follows is propaganda so scary, it is good. If Bianco really believes this, we hope BofA provides free psychiatric sessions for its employees.
Higher S&P EPS, same targets
New S&P EPS estimates: $83 2010, $90 2011, $95 2012 We raise our 2010, 2011 and 2012 S&P 500 EPS estimates to $83, $90 and $95 from $80, $88 and $94, respectively, because 2Q results at $21.40+ or $86 of annualized EPS were stronger than we expected. Although we boost our 2010 EPS estimate, $83 for 2010E assumes flat 2H10 EPS as we expect US GDP to slow to a crawl.
How can EPS rise in 2011? Is peak EPS possible this soon? [Actually a better question is how can you have visibility on 2012. Oh wait, who cares]
Despite anemic US and European GDP growth expectations for 2011, S&P EPS should rise. Lower credit costs, higher oil prices, slower but continued growth in global spending on technology and capital goods, more acquisitions and share repurchases fueled by surplus cash hoards and cheap debt financing should lead to another year of EPS growth significantly outpacing US GDP growth. The return to peak EPS is the result of a “V+” shaped recovery in non-financial EPS already achieved. Although financial EPS has not fully recovered it has more to bounce, in our view. [one word: clinical]
Analysts did not cut their rosy 2011 EPS estimates
Despite all the market volatility and macro uncertainty of the year to date, analyst EPS estimates have held remarkably steady. The bottom-up EPS estimate for 2010 has had a consistent upward drift from about $80 in January to $83 today. The bottom-up estimate for 2011 has been stuck between $95-96 since late 2009. Given that this is the third time this year we raise our EPS estimates (which have always been well above strategist consensus), maybe we should sniff the rose. While we continue to think analyst estimates for 2011 will be trimmed, we now consider the bottom-up 2011 estimate is within reach if job growth surprises upward.
Our areas of concern on analyst consensus expectations
Analysts are well aware of the macro challenges facing the economy, including deleveraging and elevated unemployment. But they are also aware of the S&P’s heavy foreign and business spending exposure, which allow healthy EPS growth despite a sluggish US consumer. Bank analysts expect foreclosures to continue and credit costs to stay high, but they also know that loss reserves and provisions are far above normal. Our and analyst EPS estimates both fit 2011 US GDP of 2.5–3.0% (us at lower end), but we likely differ on: 1) FX rates, 2) the degree of regulatory profit pressures on Financials and Healthcare, 3) we are more cautious on vulnerable areas like auto and home related spending. BofAML forecasted Euro depreciation puts our 2011E EPS nearly $2 beneath what current FX suggests.
2010 end target stays 1,300, 12-month target stays 1,350
Our 2010 end target of 1,300 is 14.5x our 2011E EPS. This represents a very high target EPS yield (~7%) despite exceptionally low interest rates. Some dismiss our target because a deflationary shock could collapse current EPS. Others argue that EPS will be flat for years. We disagree; we think exceptionally low interest rates support real estate values and EPS will grow through foreign investment. The S&P has the best of the DM and EM world, low rates and healthy growth.