US equities have risen faster than most people expected so far this year, and while some people are concerned that this could be the lead up to a market correction, Citi analyst Tobias M Levkovich argues that the gains are supported stronger earnings, pushing his S&P 500 (INDEXSP:.INX) 2014 year-end estimate from 1975 to 2000 based on $118.20 EPS (up from the previous $117.75 estimate) and setting a mid-2015 estimate of 2050.
S&P 500 earnings beat Citi estimates despite difficult first quarter
“Earnings have beaten estimates, at least in 1Q14 where even a weather-induced GDP decline did not end up crushing the bottom line,” writes Levkovich. “With share prices higher and better EPS, one has to rethink the outlook especially as mid-year approaches.”
One of the main criticisms of last year’s equity bull market is that it outpaced corporate earnings, but Levkovich argues that 2013 stock prices were benefitting from 2011-2012 earnings growth that had yet to be priced in. From that point of view, the multiples had actually been compressed in the previous two years on negative sentiment, caught up in 2013, and are now moving at a reasonable pace for a recovering economy.