Daniel Acker
Merrill Lynch strategist David Bianco is doing his best imitation of a Civil War admiral in the face of increasingly treacherous U.S. economic waters: Damn the torpedoes, full steam ahead!
Despite the decision by his own firm's economists to slash their 2011 forecast for U.S. gross domestic product growth to 2.6 per cent from 3.3 per cent, Mr. Bianco said he is sticking with his S&P 500 earnings-per-share target of $88 for next year - representing growth of 10 per cent over his 2010 forecast, and almost 40 per cent above the S&P 500's actual earnings in 2009.
Mr. Bianco also held firm on his 12-month price target of 1,350 for the S&P 500 - almost 30 per cent above current levels.
Mr. Bianco's reasoning for his steadfastness is consistent with a theme he has been trumpeting for some time now: That the S&P 500 is a very different animal from the U.S. economy.
As he pointed out in Merrill's mid-year strategy briefing last week, the S&P 500 has far more exposure to foreign markets than the U.S. economy does - fully 40 per cent of the index's profits are derived from operations outside the United States. The index is also over-exposed to commodities relative to the broader economy, which amplifies the influence of overseas demand, particularly from resource-hungry China.
Meanwhile, the S&P 500 is relatively under-exposed to the biggest area of risk for the U.S. economy - consumer spending. As Mr. Bianco noted, the decision by Merrill's economists to cut their GDP growth forecasts was driven primarily by a slower outlook for domestic household consumption.
"Hence, these revisions to U.S. GDP estimates have little impact to our S&P 500 EPS outlook," he wrote in a report to clients. "And since we had already taken a cautious view on the earnings growth potential at S&P retailers, household durables and auto companies, this slower household spending growth outlook does not threaten our consumer discretionary sector earnings estimates."
David Parkinson