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St. Anthony: Bulls, bears diverge on earnings

  • Article by: NEAL ST. ANTHONY
  • Star Tribune
  • September 30, 2012 - 5:41 PM

As market watchers await the kickoff of third-quarter earnings season this month, there's ample evidence that the torrid pace of corporate earnings over the past couple of years is starting to slow.

Adhesives maker H.B. Fuller, for example, last week lowered its fourth-quarter sales forecast, even though the company didn't back off its full-year earnings expectations. Still, Fuller shares fell 8 percent through Friday's trading.

"We think earnings are at risk," Adam Parker, chief U.S. equities strategist at Morgan Stanley warned Friday on Yahoo Finance's Breakout video blog. "Nobody's asking about recession scenarios for earnings, which I find surprising, given you have a big [federal] fiscal cliff, a European recession, and decelerating GDP in most major emerging market economies, in addition to soft U.S. economic news now."

Parker is among the bears who believe the S&P 500 could lose 10 percent of its value in the fourth quarter.

Yet the Bloomberg-Star Tribune 100 index of Minnesota's largest companies and the Standard & Poor's 500 companies are expected to post another year of record earnings in 2012, according to analysts' projections aggregated by Bloomberg.

The rate of earnings growth is slowing because big companies have boosted profits over the past few years on modest revenue increases, thanks partly to increases in worker productivity, innovation and cost-cutting. And eventually higher sales will be needed to propel earnings higher.

But where bears see despair, bulls see opportunity.

"When emotions are great, fundamentals become overlooked," said Harrison Grodnick, portfolio manager at the Minneapolis Portfolio Management Group whose composite portfolio has been a market beater for most of the past 20 years. "While fear and anxiety still dominate most investors, the amount of cash sitting on the sidelines is approximately $10 trillion. History has shown that with that kind of liquidity, positive economic returns are much more probable than negative economic returns."

The Standard & Poor's 500 trades today at about 14 times expected 2012 aggregate per-share earnings, a modest premium compared with the 15 to 20 times of past bull markets.

Grodnick added that the Federal Reserve's third round of easy money won't jolt the economy. But he believes the housing recovery will.

"First, one must take out a mortgage, then hire movers, then buy new furniture, then purchase insurance, buy a lawn mower, perhaps a new flat-screen TV, then hire a contractor to do the new kitchen ... and the list goes on," Grodnick said. "A recovery in housing can lead to an underappreciated multiplier effect that, when coupled with our current state of liquidity, could prove to be the match that finally ignites our sluggish economy."

Re-acceleration?

Jim Paulsen, economist and market strategist at Wells Fargo & Co., correctly predicted a year ago that the stock market would rise and employment would start picking up this year. He doubts the market will rise much more in the fourth quarter.

Year-to-date total return for the S&P 500 through Friday was 16.5 percent. The Bloomberg-Star Tribune 100 (ticker: BSTAR) is up 12 percent. From Oct. 3, 2008, through Friday, the two indexes are up 43.26 percent and 51.23 percent, respectively.

Paulsen listed several upticking economic indicators, from monthly employment figures to lower consumer debt, rising bank lending and consumer confidence that he believes indicate an accelerating recovery in 2013.

"I expect increasing evidence from China and elsewhere showing that the emerging world economic recovery is starting to re-accelerate, which would help the U.S. manufacturing sector [which has softened recently] and would improve the global outlook," Paulsen said. "That would likely propel the U.S. stock market higher next year, as well. For now, it is not uncommon for stock prices to take a breather after such an impressive run.''

He is not worried about the outcome of the elections. "Economic growth will overcome whomever is elected."

Brian Belski, market strategist at BMO Capital Markets, said concerns about the elections, job growth and still-cautious investors will keep the market in its current range in the fourth quarter.

"Our private clients are still buying [low-yielding bonds]," Belski said. "We still believe we are on the verge of the next great equity bull market ... name-brand globally diversified industry leaders that are powered by innovation, brand loyalty and fundamental consistency."

Staff writer Patrick Kennedy contributed to this report. Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com

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