Final German PMI Manufacturing figures beat estimate
The new year is off to a good start as final PMI Manufacturing figures for December in Germany and Italy came out better than expected. Prior to these figures investors also got better than estimated PMI Manufacturing figures from China yesterday. While the figures do not point to huge growth they are enough to pull stocks into green territory with the DAX Index above the 6,000 mark, up 2.1 percent. Are analysts right this time? With UK and US markets closed due to the New Year’s holiday it is worth looking at the S&P 500 from a standpoint of what is expected in 2012. The current forward 12-month EPS estimate is 102.6 compared to the actual 12-month rolling EPS of 95.0 indicating expectations of around eight percent nominal growth. Is this too optimistic? Well our own 2012 year-end EPS target is 104.5 with a P/E ratio of 11.6 indicating a price target of 1,215 compared to the current 1,257 price level in the S&P 500. Thus in our view it will not be a decline in earnings that leads to flat stock markets but rather a contraction in multiples as the economic growth outlook remains subdued. Isn’t eight percent growth in EPS too high? Remembering that the average S&P 500 company is internationally diversified with revenue and profits from many different regions it is not impossible. According to the World Bank the historical nominal GDP since 1962 has been 8.1 percent annualised so in that regard a growth rate of eight percent in nominal earnings would be outrageous.
What is interesting though about analysts’ views on the S&P 500 is that they have lowered their 12-month forward estimates which is contrary to what happened in ’07 and ’08 where analysts remained way too optimistic, even though earnings were actually declining. The question this time is whether they have got it right now or are they letting their emotions be driven by the negative headlines impacting their estimates.
Peter Garnry
SAXO BANK