Just when many investors are acknowledging the sudden swoon of U.S. stocks as the sign of a market top, some of Europe’s biggest money managers are anticipating a profit rebound for American firms and slowing profit growth at home.
While analysts say corporations in the Standard & Poor’s 500 index are poised for their first quarterly decline in earnings since 2002, Fortis Private Banking, New Star Asset Management and CCLA Investment Management, which together oversee $127 billion, are looking forward to faster growth next year. The weakening dollar and lower interest rates give U.S. companies the advantage.
Analysts boosted 2008 U.S. estimates to 12 percent in the past two months and cut those for Europe to 11 percent, according to data compiled by Bloomberg. The last time American companies grew faster was in 2004, according to Bloomberg and Zurich-based UBS AG, the world’s biggest money manager.
“We see a good earnings evolution in the U.S., where most negative news has been priced in the market,” said Guillaume Duchesne, a Luxembourg-based equity strategist at Fortis, which oversees $76 billion. “In Europe, expectations are high so the risk of bad news is more important.”
Fortis raised its allocation for American stocks to “overweight” for the first time in more than a year and cut its holdings in Europe, Duchesne said.
But companies as diverse as Bank of America Corp. and Peoria-based Caterpillar Inc., the world’s largest maker of bulldozers and dump trucks, reported third-quarter earnings below analyst forecasts.
Caterpillar, a beneficiary of the declining dollar, said in a statement the U.S. economy will be “near to, or even in, recession,” next year, nullifying the effects of booming sales abroad.
Stocks in the S&P 500 traded at 18 times earnings this month, the most expensive compared with Europe’s Stoxx 600 since 2005, where shares were valued at an average 13.9 times profit.
U.S. valuations are too high for Thomas Schuessler, a fund manager at DWS Investments in Frankfurt who helps oversee $381 billion.
“While the U.S. has become more attractive, the tricky part is how low will the dollar go,” said Schuessler. “The stock market may do better, but you lose it on the currency. For a European investor, the S&P 500 is not really attractive.”
U.S. earnings may get a boost as the dollar makes American goods more competitive, analysts’ estimates compiled by Bloomberg suggest. Analysts raised their 2008 forecasts for S&P 500 profit gains to 12.2 percent from 11.3 percent in the past two months, Bloomberg data show. They also cut their growth estimates for companies in the Stoxx 600 to 10.9 percent from 11.6 percent.
“Investors have priced in continuous strong growth in Europe, and momentum is fading,” said Gregor Logan, co-chief investment officer at New Star in London. “In the U.S., there is much less growth, but hopefully momentum is about to turn.”
“These European companies are hurting,” said Lincoln Anderson, chief investment officer of LPL Financial Services in Boston. LPL cut its international stock holdings to 10 percent from 20 percent in the past year, boosting the firm’s U.S. allocation to 90 percent.
Simon Melluish, who helps oversee $4.5 billion at Gartmore in London, bought shares in Chicago-based Boeing Co. and Oak Brook-based McDonald’s Corp. “When we look around for truly global multinational names that are benefiting from dollar weakness, you get that in large U.S. companies,” said Melluish. “We can find better valuations in Europe, but where we can find companies that aren’t crazy valued and are getting good growth rates, we are happy to buy.”
