Investors are depending on banks more than at any time in at least 60 years to lead the US out of the longest earnings slump since the Great Depression.
American companies will end more than two years of declining income by the fourth quarter, according to analyst forecasts compiled by Bloomberg. According to the data, banks will be responsible for all of the 76 per cent rebound in the final three months of the year, because – without financial companies – the gain turns into a 4.5 per cent decline.
Rathbone Brothers, MFS Investment Management and TD Ameritrade Holding say the reliance on banks is making them increasingly concerned that the 25 per cent gain by the Standard & Poor’s 500 Index since March 9 – the steepest rally since 1938 – will dissipate. While rising home sales and durable-goods orders show the economy may be bottoming, unemployment and consumer debt as well as prospects that banks will be forced to write down more loans may halt the gain in equities.
“People should not get carried away,” said Julian Chillingworth, the London-based chief investment officer at Rathbone Brothers, which had more than $14.6 billion in assets under management at the end of last year. “We first need to see genuine signs of an economic recovery.”
In fact, futures on the S&P 500 took a hit after Mike Mayo, the New York-based analyst who left Deutsche Bank to join Calyon Securities, recommended selling banks because of his forecast that loan losses will exceed levels from the Great Depression.
In the 11 recessions since 1938, stocks have rebounded an average of five months before a recovery in earnings, according to data compiled by Bloomberg. The economy has contracted for 16 months, equalling the two longest slumps – between 1973-1975 and 1981-1982 – since the Great Depression.
The earnings decline that has lasted for six straight quarters will get worse before it gets better, with profits at S&P 500 companies decreasing for three more periods, Bloomberg data show. Companies from Microsoft to DuPont already said profits will be disappointing.
More From This Section
Analysts predict banks, brokerages and insurers will earn about $21 billion in the last three months of 2009, compared with a loss of $65 billion a year earlier, according to estimates compiled by Bloomberg.
Financial companies led the stock market’s plunge from a record high in October 2007 as Bear Stearns collapsed, Lehman Brothers Holdings went bankrupt and the government set aside at least $218 billion to prop up American International Group and Citigroup. All four firms are based in New York. Since the S&P 500 reached a record, financial shares have lost 73 per cent, the biggest slump among 10 industry groups.
Almost $1.3 trillion in bank losses tied to subprime mortgages froze credit markets and led to a 6.3 per cent US economic contraction in the fourth quarter.
The S&P/Case-Shiller Composite-20 Home Price Index tumbled 29 per cent from a 2006 peak and the US unemployment rate jumped to a 25-year high of 8.5 per cent in March.
The first-quarter earnings season starts tomorrow with Alcoa, the largest US aluminum maker. The New York-based company will report an adjusted loss of $368 million, after making $341 million in the year-earlier period, analyst estimates show.
For S&P 500 companies, profits will probably fall 37 per cent, according to estimates from more than 1,700 securities analysts compiled by Bloomberg.
Earnings may drop 31 per cent in the second quarter and 18 per cent in the next before gaining in the last three months of the year, they predict. The 76 per cent jump would be the biggest quarterly increase in earnings in more than two decades, based on Bloomberg and S&P data.
Getting there will depend on financial companies.