Earnings Growth Returns to Norm, Shares Still Cheap

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http://www.bloomberg.com/news/2011-07-10/profits-climbing-to-51-year-average-as-s-p-500-multiples-at-crisis-levels.html

Earnings growth in the Standard & Poor’s 500 Index is climbing back to the average rate since the 1960s as the U.S. economy recovers, even with equity valuations stuck near credit-crisis levels.

Companies in the S&P 500 are poised to boost net income by 19 percent in 2011, including a 13 percent gain in the second quarter, according to analyst estimates compiled by Bloomberg. The gain will push profits back in line with their average increase of 6.9 percent over the last 51 years, data compiled by Brockhouse & Cooper Inc. and Bloomberg show. At the same time, the index is trading for 13.5 times projected 2011 earnings, 7.8 percent less than the average since the start of 2006.

The gap between earnings and shares is bolstering bulls who say equities will keep rallying as prices catch up to profits. Skeptics say reduced stimulus spending, Europe’s debt crisis and China’s efforts to curb inflation signal the 99 percent rally in the S&P 500 since March 2009 has gone too far. A report showing employers in the U.S. added 83 percent fewer jobs in June than economists projected heightened concern the economy is slowing.

“The fact that valuations have not returned to normal is simply that people are prejudiced against stocks,” said David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York. “Earnings growth has been spectacular. People who are buying stocks today are buying an undervalued asset.”



*** disaster capitalism is why they've done so well.