While reading through this Bloomberg article on the record prices for M&A deals, I uncovered this little nugget: analysts now expect 2011 earnings of S&P500 stocks to reach nearly $95. Considering that before the crash those corporations were making roughly $100, the economy is expected to bounce back much more then the headlines we see every day suggest. In fact, if you look at any stock you own that wasn't crippled by the crisis, you should expect its stock price to reach back to its highs back at the peak.
Heck, the momentum of 2 years where earnings grow on aggregate by 52% would probably be enough to force stocks above those 2007 highs. At Stone Fox Capital we've remained very bullish, but this is probably beyond where we expected the economy to be and this is the average analyst not the outlier. This definitely bodes well for our 'melt up' theory. And based on the fact that so many articles talk about how expensive the market is now, it surely isn't backed into the expectations of the market.
Back to the M&A premiums as that news is almost as astonishing as the earnings picture. Paying record premiums especially in this economy definitely backs up the earnings picture in the future. When somebody like Buffett is willing to pay a 23% premium for a railroad, then the market should take notice that earnings a few years out might just rebound to previous highs.
- Chief executive officers are so sure the economy will keep recovering they’re agreeing to prices that are 37% higher than the average since 2001, when Bloomberg started compiling data. While stocks in the S&P 500 are trading at the most expensive valuations in seven years compared with profits in the last 12 months, buyers are looking out to 2011, when analysts say earnings will have risen 52%.
- American companies are paying the biggest premiums on record in takeovers, a sign executives are growing more bullish about profits and stocks even after the biggest rally for the Standard & Poor’s 500 Index in 73 years.
- Executives say they’re finding bargains based on projected earnings. Analysts predict per-share income for companies in the S&P 500 will jump to $94.98 a share in 2011 from $62.52 this year, according to the average estimates in a Bloomberg survey.
Disclosure: No positions
