Top Strategists Cut S&P 500 Index Outlook
Monday July 30, 2:15 pm Eastern Time
By Nick Olivari
NEW YORK (Reuters) - Three of Wall Street's top strategists on Monday cut their year-end earnings outlook for the Standard & Poor's 500 index (.SPX), and one even predicted the benchmark for Corporate America's largest companies will fall another 9 percent from current levels.
The new forecasts raised further concerns that the full impact of the U.S. economic slowdown on corporate earnings is still to be felt, though one of the strategists kept a bullish forecast for year-end 2002, predicting a 50 percent gain.
Doug Cliggott, chief portfolio strategist at J.P. Morgan Chase & Co., cut his year-end target for the index by 100 points to 1,100 amid uncertainty about a recovery in earnings.
Cliggott, the only strategist at the end of 1999 to correctly predict the index would close 2000 lower than where it began, also cut his 2002 year-end target to 1,200 from 1,300.
``A very cautious approach to the U.S. equity market makes a lot of sense until there are unambiguous signs of a real earnings recovery,'' Cliggott said in a note to clients.
Over the next three to six months, he sees ``continued downward pressure on both commodity prices and capital spending,'' and little hope of a sequential improvement in earnings per share in the last two quarters of the year.
Though he cut his EPS outlook for this year, UBS Warburg's Ed Kerschner, ranked the No. 1 sell-side strategist by Institutional Investor, said the index would be at 1,835 in 17 months, a 50 percent gain current level of about 1,200.
Also cutting earnings forecasts for the S&P 500 index was Tom Galvin of Credit Suisse First Boston, who cited high energy costs, a strong dollar and weak overseas economies for hurting companies.
The S&P 500 index was little changed in midday trading, falling 1.38 points, or 0.11 percent, to 1204.44.
UNLIKELY EARNINGS RECOVERY
Cliggott, who made the most accurate index forecast in 2000 among the major investment houses, now stands alone among the top sell-side strategists in being the only one to forecast the index will end the year lower than where it currently trades.
Cliggott cut his 2001 operating earnings per share for the index to $44 from $50, assuming that EPS in the second half will be the same as it was in the first half.
His 2002 operating EPS estimate is $46.50, a 6 percent increase on the 2001 forecast.
``Based on the what we've been through in the most recent reporting period, it's not surprising that earnings estimates and targets are coming down,'' said Franklin Morton, director of research for Chicago-based Ariel Capital Management Inc., which oversees $6.2 billion in assets.
``The $64 million dollar question is whether we have to come down another notch at the end of the third quarter,'' he said.
Kerschner cut his 2001 earnings per share outlook for the index to $49 from $53, saying the U.S. economy shows few signs of rebounding, foreign demand has weakened and the dollar continues to strengthen.
``At the start of 2001, we were forecasting flat earnings for the year, down 6 percent in the first half but up 6 percent in the second half as the U.S. economy recovered,'' Kerschner told clients. ``However, any earnings recovery in the second half is likely to be weak at best.''
Kerschner also cut his 2002 estimate to $59 from $61, though he reiterated his year-end 2002 S&P 500 target of 1,835.
The U.S. economic downturn has been more severe than originally forecast, Kerschner told clients, with nine straight months of declining industrial production. The current quarter is also forecast to be the fifth straight quarter with real gross domestic product growth of less than 2 percent.
ENERGY COSTS, STRONG DOLLAR, WEAK ECONOMIES
A worldwide drop in economic activity is also hurting U.S. companies, he said, forecasting global GDP growth, excluding the United States, has dropped to 2.1 percent from 2.7 percent.
The strong dollar hurts earnings in three ways, Kerschner noted: weaker exports, stiffer competition from imports in the U.S. market and a lower dollar value for the overseas earnings of multinationals.
CSFB's Galvin cut his 2001 earnings per share for the index to $51.50 from $55.25.
``While predictable growers such as healthcare should maintain their double-digit stride, we do not expect the absolute income per share contributions for areas like tech, consumer cyclicals or transports to reach 1999 levels owing to nagging excess capacity and GDP growth of 4% or less,'' he said.
Galvin also said the lack of earnings visibility, particularly toward technology and financial earnings, ``lead us to a more conservative outlook toward 2002 and EPS target of $59,'' down from the previous estimate of $62.
Based on these new forecasts, Galvin dropped his 2002 year-end target for the S&P 500 to 1500 from 1550. |
