Surprising Optimism in Face of Weekly Global Equity Carnage; Foolish Comments of the Day; "Beat the Street" Bullsweet

Wall Street is unwavering in its outlook that the S&P will hit 1400 this year. That is nearly a 17% rally from here.

Please consider Strategists Sticking With 17% S&P 500 Rally by Year-End on Rising Profit

Wall Street has never been more sure that the Standard & Poor’s 500 Index will rally in 2011, even after speculation the U.S. economy is heading for a recession prompted the biggest plunge since the bull market began.

Chief strategists at 13 banks from Barclays Plc (BARC) to UBS AG (UBSN) see the benchmark measure of American equity surging 17 percent through Dec. 31, the average estimate in a Bloomberg survey. Their projection that the index will reach 1,401 hasn’t budged in four weeks, while mounting concern U.S. growth is slowing drove the S&P 500 down 11 percent since July 22, including yesterday’s 4.8 percent tumble.

Strategists say earnings growth will fuel gains. S&P 500 profit will rise 18 percent in 2011 and 14 percent in 2012, according to the average per-share analyst estimates in a Bloomberg survey. More than 75 percent of corporations in the index have exceeded earnings estimates for the second quarter, with total income topping projections by 5.2 percent.

Credit Suisse Group AG (CSGN) and HSBC Holdings Plc (HSBA) advised investors to buy equities today. Andrew Garthwaite, a London- based strategist at Credit Suisse, reiterated an “overweight” recommendation on stocks even as he cut his year-end forecast for the S&P 500 to 1,350.

“Our economists are not forecasting a recession and, indeed, are looking for U.S. growth to accelerate in the second half,” Garry Evans, global head of equity strategy at HSBC in Hong Kong, wrote in a note today. “Investors should look to raise equity risk gradually over the summer.”

Foolish Comments of the Day

The foolish comment of the day award is a tossup.

Garry Evans, global head of equity strategy at HSBC in Hong Kong, said "Our economists are not forecasting a recession and, indeed, are looking for U.S. growth to accelerate in the second half".

Even if that preposterous statement was true, stocks are priced for perfection here.

Jonathan Golub, the chief U.S. market strategist at UBS in New York said: “I’m reluctant to overreact to some shorter-term weakness, no matter how real it is, because the market has proven to be unbelievably resilient. If you would have been acting that way for the last two years, you would have gotten killed by this market.”

Wonderful. That same ridiculous philosophy would have gotten you killed in 2008.

"Beat the Street" Bullsweet

I mock the statement "more than 75 percent of corporations in the index have exceeded earnings estimates for the second quarter". Quite frankly it is total bullsweet.

Nearly every quarter, even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:

• Corporations give analysts "tips" regarding profit expectations.
• Those profit expectations are purposely low.
• Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".
• If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.
  
• Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.
  

When they miss they often miss big, throwing everything but the kitchen sink into the open so they can handily "beat the street" the next quarter.

That is not true with every corporation and every analyst but it is true in general. Thus most corporations, no matter what the market, recession or not, "beat the street".

Optimism in the Face of Market Plunges is Seldom Rewarded

Wall Street analysts sticks with targets that make no fundamental sense. They also call for second-half recoveries instead of recessions.

If you are a bull, optimism in the face of a sinking market is the last thing you want to see. Such optimism is seldom rewarded.

Markets rally after people throw in the towel and there are few bulls left. Judging from this group, there is much more decline to come.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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