Forget the “new normal” of lower profit growth.
Many market watchers expect corporate profits to surpass even the current rosy expectations, due to aggressive expense control and improved demand.
This optimism stands in contrast to the view of those who think that earnings gains will be hard to come by in a slow-growth environment. Bears feel that the run-up since March has resulted in stock overvaluations because the prices won't be supported by earnings.
But if estimates hold up, stocks look to be about fairly valued.
Analysts with Standard & Poor's Financial Services LLC estimate a 34.9% surge in operating earnings of the S&P 500 companies next year.
Those estimates work out to a price-earnings ratio for the S&P 500 of about 15 for next year, about in line with historical averages, said Howard Silverblatt, senior index analyst at S&P.
“The surprise of 2010 is that profits will do better than people are thinking,” said Jim Swanson, chief investment strategist with MFS Investment Management, who thinks that “dramatic” cost cutting and pent-up consumer demand will create earnings surprises.
Of the companies in the S&P 500, 125 have exceeded their prior peak profits, according to MFS, while only 80 have reached their previous price peaks.
“We're likely to see a V-shaped recovery in earnings even if U.S. growth remains subpar,” said Ed Yardeni, president and chief investment strategist at Yardeni Research Inc.
Forty percent profit growth for the S&P 500 next year is realistic, he said.
“You get the biggest earnings pop coming out of a recession,” Mr. Yardeni said. That is because companies cut costs, improve their margins and then get significant bottom-line benefits from increased sales as demand improves.
The earnings recovery “seems to be playing out in the same old cyclical fashion” seen in other recoveries, Mr. Yardeni said.