Despite Slow Exit From Recession, S&P Equity Research Sees Q3 Results for S&P 500 Companies Rising 30%+

NEW YORK, Sept. 29 /PRNewswire/ -- Standard & Poor's Equity Research Services (ERS) is forecasting third-quarter operating results will advance significantly as the emergence from both economic and fundamental recession continues, albeit at a slowing rate of pace, according to S&P Chief Investment Strategist, Sam Stovall. Stovall presented these projections and others during S&P Equity Research Services' third-quarter 2010 webinar entitled "Are We Headed for a Bear Market?"

Operating results for components of the blue-chip S&P 500 index in the third quarter are expected by ERS to rise 31%, while companies in the S&P MidCap 400 and S&P SmallCap 600 should see their operating results increase by 33% and 103%, respectively. Profits for the period are projected to remain strong, aided by still-easy year-over-year comparisons, improved operating leverage, share-buyback programs, and the recent weakening in the United States dollar, Stovall thinks.

Also boding well for domestic stocks, in Stovall's view, is that domestic economic sluggishness should be more than offset by solid growth in emerging markets. Lastly, revenues are projected to continue improving, as consensus estimates compiled by S&P's Capital IQ, which operates independently of ERS, indicate that the average company in the S&P 500 should report a 15% year-over-year increase in third-quarter revenues, up from the 11% recorded last quarter.

And Stovall says earnings growth should remain strong in the fourth quarter, too, with the benchmark S&P 500 index expected to post an earnings-per-share increase of 27%, while the S&P MidCap 400 should rise 33% and the S&P SmallCap 600 should gain 80%. Earnings-per-share growth for 2011 is expected to moderate, as the 500, 400 and 600 are projected to record per-share profit increases of 14%, 23% and 32%, respectively.

However, risks to the economy remain. Should the U.S. experience a double-dip recession that is also accompanied by deflation for what Stovall calls a "3-D" economy, companies trying to keep their heads above water will likely find that long-term debt -- as well as "sticky" dividend commitments -- act as an anchor, while cash would offer the buoyancy of a life preserver, he says.

Nevertheless, S&P does not expect the economy to slip into a deflationary mode. S&P Economics puts the chance of a 3-D economy at 30%. The last time the United States experienced deflation was in the 1930s, and since Stovall doesn't have sector data going back that far, Japan has become his proxy for the United States and what Stovall thinks may happen in the United States if a 3-D economy does emerge.

Japan reportedly experienced both recession and deflation in the 1990s. Therefore, Stovall examined Japan's market and sector performances to gauge what could happen in the United States should we experience the same conditions. During a nearly 20-year stretch, Japan's inflation gauge -- the average annual Core Japanese consumer price index CPI -- surprisingly hovered within a fairly narrow band of +2.7% in 1990 and -1.2% in 2009.

Most revealing, in Stovall's opinion, was that Japan experienced disinflation during the 1990s, a slowing of price increases, not deflation, an outright decline in prices.

So while an investor may be rewarded by investing in certain sectors over others, Stovall concludes there may also be many other cross-currents to contend with. Therefore, he thinks that another approach would be to select companies that may be more able to withstand an overall slowdown in economic growth and a resulting decline in prices, due to their lack of interest and dividend commitments, combined with an elevated stash of cash, according to Stovall.

About Standard & Poor's Equity Research Services

As the world's largest producer of independent equity research, Standard & Poor's licenses its research to global institutions for their investors and advisors.  Standard & Poor's team of experienced U.S., European and Asian equity analysts use a fundamental, bottom-up approach to assess a global universe of multi-asset class securities across industries worldwide.  Follow Standard & Poor's equity analysts' U.S. market commentary each day at http://www.equityresearch.standardandpoors.com/.

The equity research reports and recommendations provided by Standard & Poor's Equity Research Services are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's Equity Research Services has no access to non-public information received by other units of Standard & Poor's.  Standard & Poor's does not trade for its own account.  The analytical and ethical conduct of Standard & Poor's equity analysts is governed by the firm's Research Objectivity Policy, a copy of which may also be found at www.standardandpoors.com or by clicking here.

About Standard & Poor's

Standard & Poor's Financial Services, LLC, a subsidiary of The McGraw-Hill Companies (NYSE: MHP), is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research and data.  With offices in 23 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions.  For more information, visit www.standardandpoors.com.

SOURCE Standard & Poor's