No ceiling for large caps, say Biggs, Birinyi and BlackRock's Rendino

Analysts are boosting U.S. earnings estimates by the most in a year, a sign to Barton Biggs and Michael Shaoul that stocks will weather the biggest drop in U.S. economic forecasts since 2009. Standard & Poor's 500 Index profits may reach $104.73 a share in the next 12 months as consumer demand pushes sales up 13 percent, according to data from about 9,000 analysts compiled by Bloomberg. The income estimate rose 2.8 percent in the four weeks ended May 2. Analysts are turning more optimistic as economists cut projections for 2011 U.S. gross domestic product growth to 2.7 percent from 3.2 percent in March, the data show. Falling commodity prices and economic data that have trailed forecasts by the widest margin since August sent the S&P 500 down 2.2 percent since its high on April 29. Declines were twice as much in stocks that led last year's rally, the data show. To Traxis Partners LP's Biggs, Kevin Rendino of BlackRock Inc. and Marketfield Asset Management's Shaoul, earnings growth will reverse the losses and extend the index's two-year advance of 97 percent. “Investors are overreacting,” said Biggs, citing concerns about the European debt crisis, housing and reduced stimulus from the U.S. Federal Reserve. “All those worries are true, but I can see a number of them will be resolved in the next two months, and I do not think the global economy will slow down significantly. Stocks are very reasonably priced on earnings for next year.” Deere, GE Biggs, who oversees $1.3 billion in New York, favors machinery companies such as Moline, Illinois-based Deere & Co., General Electric Co. in Fairfield, Connecticut, the biggest maker of jet engines, and Peoria, Illinois-based Caterpillar Inc., the largest supplier of earthmoving equipment. The S&P 500 doubled from its March 2009 low to 1,363.61 on April 29, its highest level since June 5, 2008, as earnings topped estimates for nine straight quarters. Per-share profits in the S&P 500 are forecast to climb 17 percent in the next year after increasing 36 percent in 2010, Bloomberg data show. “Companies have executed,” said Rendino of BlackRock, which oversees $3.64 trillion in New York. “Each quarter there seems to be an abundance of bears saying, ‘This is as good as it gets,' and the quarter after that, it's even better. It's emblematic of the fact that U.S. corporations have executed quite brilliantly through this cycle. Stocks are cheap.” Greek Downgrade The S&P 500 slipped last week, falling 0.3 percent to 1,333.27, as profit from Dell Inc. that exceeded analyst predictions was offset by a credit downgrade of Greece by Fitch Ratings. Housings starts in the U.S. unexpectedly fell in April as flooding and tornadoes in the South shut down construction, the Commerce Department said May 17. June futures on the benchmark gauge dropped 0.6 percent to 1,320.1 as of 8:26 a.m. in London today. Analysts have raised forecasts for S&P 500 earnings during the next 12 months each month this year, according to average projections compiled by Bloomberg. They expect companies in the benchmark gauge to earn $104.73 a share, up from $96.92 forecast at the beginning of January, the data show. The four-week increase on May 2 represented the biggest gain since May 2010, data compiled by Bloomberg show. Equity Valuations Global per-share earnings will rise 18 percent in 2011, Citigroup Inc. said May 18, boosting a previous prediction of 12 percent growth. Earnings are estimated to increase 11 percent in 2012 and 9 percent in 2013, analysts led by Robert Buckland, Citigroup's chief global strategist, wrote. A total of 328 of 454 companies in the S&P 500 that reported earnings since April 11 exceeded estimates, according to data compiled by Bloomberg. Rising income has held down valuations in the S&P 500 as it rallied 30 percent from last year's low of 1,022.58 on July 2. The index traded at 14.9 times profit since then, on average, compared with a mean price-earnings ratio of 16.4 since over the past 57 years, data compiled by Bloomberg show. “You'll have a couple of months when people can convince themselves that anything will happen,” said Shaoul, the New York-based chairman of Marketfield, who oversees $1 billion and beat 99 percent of his peers last year. “People will start to worry about the U.S. economy. In the end, corporate earnings will tell them they needn't worry.” Marketfield owns shares of Memphis, Tennessee-based FedEx Corp., operator of the world's biggest cargo airline, network- gear maker Ciena Corp. in Linthicum, Maryland, and Omaha, Nebraska-based Union Pacific Corp., the largest U.S. railroad by sales, according to a March 31 filing. Economic Reports Government reports on the economy are failing to match economist projections. The Citigroup Economic Surprise Index, which tracks how much data has varied from predictions in Bloomberg surveys, has sunk to minus 49.1, meaning reports are missing projections by the most since August. The measure, which starts in 2003, reached a record high of 97.5 in March. A gauge of stocks whose gains or losses have exceeded the market's return shows companies that led last year's rally are trailing in 2011. The S&P 500 High Beta Index of 100 stocks such as Advanced Micro Devices Inc. and Massey Energy Co. has dropped 4.9 percent in May and has lagged behind the broader measure for three months, the longest stretch since November 2008. The S&P 500 has dropped 2.2 percent since April 29. ‘More Defensive' “We are at a stage of the recovery now where a more balanced mix of sector leadership is likely to emerge,” said Jeff Palma, a strategist at UBS AG in New York. “Numbers are not as strong as we're used to, but we think it will be sustainable. If you've been pushing a very cyclical strategy, then it is time to become a little bit more defensive.” Palma expects the S&P 500 will end 2011 higher than last week's close and advises holding more technology, health-care and phone stocks than are represented in indexes. UBS raised its per-share profit forecast for the equity index last week to $101 from $96. The advance since the S&P 500's 2011 bottom on March 16 has been led by companies whose earnings are least-dependent on economic growth. Health-care stocks such as Johnson & Johnson have the biggest increase among 10 industries at 14 percent. The household-product group including Procter & Gamble Co. climbed 12 percent, phone companies like AT&T Inc. gained 12 percent and utilities such as Southern Co. rallied 11 percent. Before March 16, those groups had the four smallest returns of the bull market. ‘Playing Catch-Up' Laszlo Birinyi, president of Westfield, Connecticut-based money-management and research firm Birinyi Associates Inc., said higher estimates from securities analysts show they are “playing catch-up,” and aren't a bullish signal. The 67-year- old former head of Salomon Brothers Inc.'s equity desk said he's still buying shares after being one of the first to advise clients to own stocks as the market bottomed in March 2009. “The earnings outlook is good and the earnings have been good because companies have taken advantage over the past several years to restructure and realign themselves,” Birinyi said. “I'm still bullish and I want our clients and investors to realize this is a protracted, long bull market. Don't get shaken out by the 3 percent or 4 percent declines.” Salesforce.com Inc. in San Francisco, the largest supplier of online customer-management software, Denver-based Chipotle Mexican Grill Inc., the burrito chain spun off by McDonald's Corp., and Paris-based Hermes International, the maker of Birkin handbags, are among stocks Birinyi recommends. Drugmakers, Utilities Months in which so-called defensive industries lead the market have been a time to buy stocks in the past, according to data compiled by Birinyi Associates. The S&P 500 has returned an average of 11 percent in the 90 days after drugmakers, utilities, household-products producers and telephone stocks led the index by 5 percent or more for two months, data from 13 instances since 1960 show. During those rallies, technology makers, retailers and banks posted the biggest gains. “Valuations are still reasonable and they won't preclude the market from doing well,” said Larry Puglia, who runs the Blue Chip Growth Fund at Baltimore-based T. Rowe Group Inc., which oversees more than $500 billion. “Corporate earnings have been quite impressive, which is favoring stocks.” --Bloomberg News--