That’s right — the equity market recovery/rebound/dead cat bounce (delete as appropriate) has got further to run, UBS says.
The reason? “A more constructive view on earnings”, according to the Swiss bank:
Since the beginning of 2010, the U.S. economy and earnings results have been meaningfully stronger than expected. As a result, the market has rallied sharply, with the S&P 500 up 9% year-to-date, and 15% since its February lows. Moreover, the “junk trade” has re-emerged, with the most economicallysensitive companies and lower quality stocks outpacing the broader market.
Our upward revision to 1,350 is fueled by an increase in our S&P 500 operating EPS estimates for 2010 and 2011 to $90 and $100, respectively, from $83 and $92.
With respect to valuation, we expect multiples to hold their ground in the face of rapidly improving earnings through the remainder of the year. As such, our year-end price target is based upon a forward P/E multiple of 13.5x applied to our 2011 EPS estimate of $100.
All of which might explain why equity investors aren’t worried about things like the meltdown in Greece, more burdensome financial regulation, or the possibility that sooner or later the US Federal Reserve will have to start tightening. They are all focused on the outlook for corporate earnings.
And according to UBS, this is not just a cost-cutting story any more — revenues are also growing, as this table shows:
As UBS continue:
With over one-third of the S&P 500 companies having reported 1Q10 results, the pattern of beats appears to be playing out in a similar fashion to last quarter. Our sense is that analysts’ estimates will continue to lag behind fundamentals and will surprise throughout the remainder of the year
Full steam ahead then?
(For the record, the S&P closed at 1,217 on Friday).
Related link:
Signs point to more stock gains – WSJ
A slow grind higher – FT Alphaville