Higher Earnings Could Propel Stock ETFs
May 4th 2012 at 7:00am by Tom Lydon
With the majority of stock components revealing better-than-expected earnings results, major indices, along with the exchange traded funds that track them, could be in for a record breaking year. Of course, Europe’s debt crisis is the wildcard.
According to a poll of 10,000 analyst estimates, the S&P 500 could top off at 1,569.74, a little above the October 1,565.15 all time high, reports Inyoung Hwang for Bloomberg. However, strategists caution that investors should not expect anything more than the 12% rally this year. [Better-Than-Expected Earnings Lift Stock ETFs]
SPDR S&P 500 (NYSEArca: SPY) has gained about 12% year to date.
Bullish prognosticators, though, expect the S&P’s earnings to hit records every year through 2014 as a result of Federal Reserve stimulus measures. So far, more than 70% of the companies have beaten first quarter estimates.
“When companies beat, their stocks are basically unchanged relative to the market,” Barry Knapp, head of equity strategy at Barclays Plc, said in the article. “What drives real secular bull markets is multiple expansion. Massive policy uncertainty exists today in both monetary and public policy. Settling those two issues is a necessary condition to have another bull market.”
The analysts believe the companies will show 13 straight quarters of higher-than-expected earnings and record profits through 2014, with earnings rising up to 14% in 2012.
“The financial strength of corporate America is stronger than people believe,” Jeffrey Schwarte, a money manager at Principal Global Investors, said in the article. “We believe earnings ultimately matter.”
Seeking Alpha, though, notes that market participants believe earnings growth will be flat or negative as economic problems from the Eurozone and U.S. government deficits impede the markets, much like they did last year.
If you were to use the 6.74% annual earnings growth rate, earnings per share would be $101.45. Considering the most recent close of 1403.36, the S&P 500 would have to rise 20% to hit its historical earnings multiple at current prices, Ploutos added.
Within the S&P 500, the SPDR Technology Select Sector Fund ETF (NSYEArca: XLK), which is up 17.5% year-to-date, and SPDR Financial Select Sector Fund ETF (NSYEArca: XLF), which is up 19.1%, are leading the market. Meanwhile, the SPDR Utilities Select Sector Fund ETF (NSYEArca: XLU) brings up the rear, remaining unchanged year-to-date.
SPDR S&P 500
For more information on the overall market, visit our S&P 500 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.