2011 S&P profits

I usually don’t read Barron’s. Early in my career–and that was a long time ago–I combed through it carefully every weekend.  But I found that any time I relied on an idea that appeared in the magazine I lost money.  Of course, I was much less experienced then, and I had done what I considered careful research in every case.  But I concluded that, although I didn’t know why reading Barron’s did me no good, I knew that for me its ideas were toxic.  So I stopped.

Yesterday morning, I found complimentary copies of the Wall Street Journal and Barron’s on my front lawn.  So I brought both inside and paged through Barron’s for the first time in years.

It seems a lot more superficial than I remember it.  The Market Week section still has a ton of statistics, but the rest of the magazine struck me as a mere shadow of its former self.  It could just be me, but it may also be the effect of the change of ownership of the magazine that put it in the Rupert Murdoch empire.  After all, that same move clearly resulted in a sharp decline in the quality of the business information in the Journal.

Still, one column in the main section, Profit Growth:  From Great to Good, caught my eye (it also appeared online as: Yearning for Earnings in 2011).  It contained advice that didn’t exactly square with the evidence advanced for it, but the interesting part was a table from ThomsonReuters that aggregated the consensus earnings estimates of Wall Street brokerage firms for the S&P in 2010 and 2011.

In my earliest posts (I began writing this blog just before the market bottom in 2009), I’ve written extensively about what happens in the early days of a market rebound from recession. But we’re now 5 quarters from the low point in S&P profits, 6 quarters since the official end of recession and 7 quarters from the bottom in the stock market.  In other words, we’re no longer in the early days of recovery.  In a typical up cycle, lasting maybe three years, investor emphasis gradually shifts from value stocks that benefit from the overall economic rebound to growth stocks that are capable of generating their own earnings momentum internally, with only a mild tailwind from the economy aiding them.

The table illustrates the point or maturing recovery pretty sharply.  It shows that S&P earnings will likely have grown by 32% year on year in the fourth quarter.  That will cap off four quarters in which S&P profits will have expanded by 38% vs. the prior year.

Prospects for 2011?  A 13% advance, or only about a third of the rate of 2010.  A glance at value- and growth-oriented market indices suggests the corresponding shift from value to growth began to take place in early September.

The chart also breaks out growth prospects by industry, as follows:

–on the low-growth side of ledger:  utilities, health care, technology and staples

–on the high-growth side:  materials, financials, industrials, consumer discretionary and energy.

I’m not sure these figures are enough to base an investment strategy on.  On second thought, they may be useful in delineating the underperforming industries, the ones like health care and utilities that have persistently slow earnings growth.  So they show you the areas to avoid.

But this part of the market cycle typically also favors smaller capitalization names, so in an industry undergoing rapid structural change, like technology, the sub-par overall growth rate may mostly reflect the fact that newer, smaller companies are eating the lunch of older-generation giants.

Overall, the chart has two messages:  2011 offers the possibility of being another 10%+ year for stock prices, but it will be harder to achieve outperformance than 2010 has been.


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