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Take the political uprisings in the Middle East, high oil prices, the nuclear crisis in Japan and a potential withdrawal of economic stimulus from the U.S. Federal Reserve and what do you get? Bullishness, according to David Bianco, head of U.S. equity strategy at Bank of America.
Mr. Bianco has been one of Wall Street's most enthusiastic bulls. While he agrees that markets will be facing a few challenges, he believes that the current level of the S&P 500 - at 1315, trading at 13.8 times his estimated 2011 earnings per share of $95 (U.S.) - already reflects a considerable amount of pessimism.
"This low PE suggests to us that investors either fear an earnings collapse (recession) or a surge in interest rates (high inflation). We see low risks of either happening," he said in a note. "We reiterate that a better entry point than 1250-1300 is unlikely and encourage investors to focus on positive earnings-per-share stories and add positions to big cap technology, industrials, energy and materials."
That said, he does expect year-over-year earnings growth to slow down from its double-digit pace in 2010. In 2011, he expects earnings growth of 8 per cent to 10 per cent, slowing again in 2012 to growth of 6 per cent to 8 per cent.
"With S&P 500 EPS rebounding back to prior peak levels in the fourth quarter of 2010, we believe the EPS cycle is maturing from recovery and early-cycle expansion to mid-cycle expansion, during which EPS growth typically slows," he said.
He pointed out that since 1975, S&P 500 EPS growth has slowed on average from 24 per cent during economic recoveries to 11 per cent during mid-cycle expansions.