Market Commentary--Joe Battipaglia, August 7, 2000...
gruntal.com
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Edited for ease of reading.
>>> Weekly Perspective
The second quarter reporting season is nearly complete. Once again, U.S. corporations are posting strong results ahead of expectations. To date, 86% of companies we surveyed met or surpassed consensus expectations for quarterly earnings.
Last week, First Call estimated that S&P 500 earnings should show a 22% increase versus last year’s results when all is said and done. With over 90% of companies having already reported, I am comfortable with this conclusion. Third quarter earnings are also expected to show solid growth of about 18% versus last year.
With a strong first half essentially behind us, I am raising my full year, 2000 estimate for S&P 500 operating earnings to $60.85 from $59.56. My year 2001 estimate is also being raised to $69.00 from $65. My forward multiple on operating earnings now stands at 24.0 times earnings versus last August’s multiple of 24.8 times.
Next year’s earnings estimate assumes that growth gradually slows to a 13-14% annualized run rate – somewhat slower than the current level, but comfortably ahead of historic averages.
The potent blend of ingredients that helped create the current cycle of earnings growth remains intact despite six rate increases by the Federal Reserve over the past twelve months. These ingredients include: historically high levels of aggregate consumer demand, robust investment spending on technology and equipment, rising worker productivity, improved results from foreign affiliates and increasing strength of corporate balance sheets.
As the months unfold, year-over-year comparisons may become a bit more difficult, but the aggregate level of earnings should be impressive and well above historic norms. The important implication for investors, of course, is that an extended profit cycle should help lift equity values further.
A look back at the past several years shows a strong correlation between profit growth and the performance of underlying equities (see chart). Over longer periods of time, the relationship holds true as well. Since 1960, for example, a 7.3% annualized rate of earnings growth coincided with a 8.6% annualized rate of return on the S&P 500 through year-end 1999.
Today, U.S. corporations are well positioned to generate outsized profit growth following years of financial and operational restructuring, less government regulation, greater access to foreign markets, relatively stable input prices, a shift in aggregate product mix in favor of higher margin goods based upon intellectual property, and improved economy’s of scale. This ability to generate consistently high rates of earnings growth suggests that the bull market has additional room to run.
This Tuesday, expect second quarter productivity data and the release of July producer prices. I believe these two reports will show more signs of good balance in the economy given the better than expected second quarter GDP report and somewhat lower commodity prices during the month of July.
In addition, the bond market may get some additional interest in the near term as the Treasury Department begins a $25 billion refunding of outstanding government debt. With inflation data tame and yields moving lower, I believe that the Federal Reserve will opt to leave rates unchanged at the upcoming FOMC meeting and for the foreseeable future.<<< |
