Profit Potential – US-FOREX.US
A surge in earnings among S&P 500 companies may keep the stock rally going into the fall. That’s what economist Steven Wieting of Citigroup believes could happen as industrial companies ramp up production to meet a rebound in demand. The S&P 500 is up 15% in the last four weeks and nearly 50% from its March low point. Much of that increase has come from a stabilization in the credit markets following the financial crisis, writes Wieting. Earnings season and accompanying data on unemployment and economic growth have also led many investors to conclude the worst of the recession is in the past. That still leaves most of them wondering how long a recovery will take and how fast corporations can get back to selling, and earning, what they were before the financial crisis.For the largest U.S. firms, says Wieting, a recovery in profits is now likely to come this year or next, rather than dragging on as some have speculated. He recently raised his estimates of what the S&P 500 companies will earn this year to 60 a share from 56. Next year they should turn a per-share profit of 68, up from his prior forecast of 62. Certain industries, like energy and information technology, could see even faster growth.Behind the rebound Wieting sees an industrial economy that cut too far, too fast, as the credit crisis turned into an all-out global recession. “Production declines were far more profound than the consumer downturn,” he says. So while demand for goods was coming back last quarter, production rates and capital expenditures were plummeting. In other words, companies were making fewer widgets than they were selling. Wieting points to the auto industry as an example. At the end of June, U.S. car companies were making one new car for every two being sold as managers slashed production ahead of falling sales. Now that GM and Chrysler have declared bankruptcy and moved to reorganizing, companies are planning to boost vehicle manufacturing by half this quarter. That will still leave them making fewer cars than are being sold, Wieting predicts.So how should investors react? Wieting notes that economic conditions are still dire in many ways. Unemployment is high, sales are way down and the financial system could still relapse into a volatile mess. Wieting thinks profits are coming back soon, and so he’s lowered the index’s earnings growth rate over the next four years to 10% from 12%.
The markets will likely get more clues on the economy’s direction when the Federal Reserve ends its two-day policy meeting on Wednesday. Don’t expect a change in interest rates, but investors will be interested to know if the Fed’s economists share Wieting’s views on a quick profit rebound.
Thomson Reuters contributed to this report.