Surging Profit Estimates Signal 26% Rally for S&P 500 (Lynn Thomasson and Michael Tsang)

July 27 (Bloomberg) -- Analysts are raising U.S. profit estimates for the first time since credit markets froze two years ago, reducing valuations even after the steepest rally since the Great Depression.

Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.

The failure to anticipate Goldman Sachs Group Inc.’s record second-quarter profits or Freeport-McMoRan Copper & Gold Inc.’s tripling of bullion sales forced analysts to boost 2010 projections. Wall Street firms estimate the S&P 500 will earn $74.55 a share next year, up from $72.54 in May. Stocks now trade at 13.13 times estimated profit, indicating a 26 percent increase in the S&P 500 should the index return to its five- decade average of 16.54 times annual income.

“There’s a sea change of opinion and it all goes back to the improving economic data,” said Fritz Meyer, the Denver- based senior market strategist for Invesco Aim, which oversees $348 billion. “Expectations got pushed too low in the depths of the recessionary mentality. That translates into upward revisions in earnings estimates and drives stock prices.”

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