Inside the S&P 500 Update Brief: Brighter Rearview Mirror, Rougher Road Ahead

- "Corporate earnings in 2Q continued to dramatically beat our expectations as margins surged. With S&P 500 EPS about 7% above our estimate in 2Q and 9% above consensus, we’ve adjusted up earnings level forecasts by a nearsimilar amount. But we still see a sharp slowing in EPS growth ahead."
- "Our revised S&P 500 operating EPS forecast for 2011 is $90.25 vs $86 previously, which still represents a slowing to +7% after a +36% gain in 2010. This is below 2011 sell-side consensus of $96.12 and +14.6%."
- "Very near-term EPS estimates will likely follow the familiar pattern of gradual downward revision. But 3Q consensus estimates show an outright drop from 2Q, which already appears too pessimistic. This is even as our 3Q U.S. GDP estimate is just +1.6%, and 2H 2010 has been revised down ½ percentage pt."
- "For 2011, (small) upward risks to the EPS forecast might include larger net share repurchases. However, fundamental gains driven by higher utilization rates and falling labor costs are gradually running their course. The most profitable cyclical activities, such as cross border trade, are set to moderate."
- "The recovery has yet to build up significant “cyclical baggage” that would risk a broad contraction. However, uncertainty and risk aversion could keep activity stalled and flatten earnings more than we expect."
- "Long-term budget concerns are obvious. However, the difference between slightly above-trend U.S. growth in 2011 or below-trend growth with unacceptable downside risks seems to lie in the hands of fiscal policy makers."

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