Below you will see a report issued yesterday by Citigroup Global Markets. The goal here is to discuss the KEY POINT to help investors know what we are thinking in interpretating the report and possibly use it to their investing advantage.
CITI has increased their outlook on the earnings of the S&P 500 companies for 2011 by just about 11%. This data below shows they are estimating $94.50 in earnings for the S&P Companies for 2011. ( See Bold Below)
It is relatively reasonable to expect a Price to Earnings ratio of 16 for the S&P Companies in 2011. At this level of earnings and PE ratio, that would translate to a 25% increase in the S&P Index to at least 1500 in 2011, in the vicinity if the all time high of around 1550. A comparable 25% increase in the DOW would bring the Index to around the all time high of 14,100.
Updated: We believe there is a likelihood that the Earnings on the S&P 500 will reach the magic annual rate of $100.00 in 2011. CITI is looking for Earnings of $102.00 in 2012. Therefore a P/E Ratio of at least 15 would thus be likely.
LANGE FINANCIAL SERVICES
29 November 2010
Inside the S&P 500
U.S. Earnings Outlook: Near +11% in 2011
U.S. corporate profits have both led the expansion and wildly outperformed. EPS for
S&P 500 companies probably rose 38% in 2010, and can’t come close to repeating
that performance in 2011 with margins now much higher.
However, we still look at U.S. profits in a mid-cycle context. While there is
increasing regional divergence and recurring vulnerabilities, the larger global
expansion suggests another 10%-11% EPS gain in 2011 vs our previous +7% est.
Consider that our S&P 500 EPS estimate for the current quarter already implies a
5% growth rate for 2011, even if profits grew no further beyond the 4Q 2010 pace.
The sharp rebound in commodity prices within 2010 Â¡V on both speculative and
reasonable basis – provides the strongest message on the earnings of cyclical
sectors in 2011, even if that rebound has already peaked.
We’ve made large upward revisions to Materials sector EPS and think the
commodity price rebound will somewhat re-invigorate a related global investment
cycle. While this will initially result in cost pressures, it ultimately helps broader
Industrial sector firms.
While still speculative at this point, an extension of the current dividend tax rate or
only modest boost suggests a more than 9% gain in dividend payments in both
2011 and 2012 Â¡V even more on a per-share basis. Share buybacks could surge in
excess of 50% in 2011. We estimate a conservative 1.5% drop in shares.
In conjunction with updated global forecasts published separately today in
Citiâ€™s annual Prospects for Economies and Financial Markets in 2011, weâ€™ve
updated U.S. corporate earnings forecasts, making upward revisions to 2011
and 2012 S&P 500 EPS estimates.
Expansion appears increasingly uneven,
with growth in emerging Asia leading EM, and EM in turn leading a modest and
fragile recovery in developed economies. But we still expect a reasonably solid
overall global growth pace to persist (see figure 1).
As discussed in the October edition of Inside the S&P 500, our outlook for the
U.S. economy now largely follows the stronger scenario for 2011, which
incorporates forestalled tax increases for at least two years (please see â€œTax
Policy Could Break U.S. Economic Stalemate,â€ September 20, 2010 and Inside
the S&P 500, October 4, 2010).
Our S&P 500 EPS forecasts have been raised largely in line with that stronger
scenario. However, we have incorporated some offsetting fiscal tightening
through a lower path for federal discretionary spending and more restraint from
state and local spending in the U.S forecast update (see appendix 1). However,
on the assumption that tax rates on dividends and capital gains will also be
frozen or rise just slightly next year, large net share repurchases should help
push up earnings and dividends when measured on a per-share basis. This
results in an EPS boost above levels in the simulation we published in October.
Net of continued large upward surprises in corporate profits relative to both
consensus projections and the economyâ€™s performance itself, we have raised
S&P 500 EPS for 2011 from about a 7% gain to a near 11% rate, from an
upwardly revised 2010
Figure 1. Revised Citi Economic Forecasts, S&P 500 EPS Estimates
Global GDP Based on PPP
U.S. GDP 4Q/4Q % Change
S&P 500 Operating EPS LEVEL
% Chg EPS level 2008 1.5 2.8 0.0 4.9 0.0 -2.8 61.79 -26.8
2009 -1.9 -0.6 -3.5 1.3 -2.6 0.2 62.05 0.4
2010e 3.9 4.7 2.4 7.0 2.7 2.2 85.40 37.6
2011e 3.4 4.1 2.0 6.1 2.5 3.1 94.50 10.7
2012e 3.8 4.4 2.3 6.3 3.3 3.3 102.00 7.9
Source: Citi Investment Research and Analysis