Barron’s recently held its annual Roundtable with some of the luminaries of finance. Participants included Scott Black of Delphi Management; Fred Hickey of The High-Tech Strategist; Abby Joseph Cohen of Goldman Sachs, Brian Rogers of T. Rowe Price, Meryl Witmer of Eagle Capital Partners, Mario Gabelli of GAMCO Investors, Oscar Schafer of O.S.S. Capital Management, Bill Gross of PIMCO, and Felix Zulauf of Zulauf Asset Management. And the battle between the bulls and the bears has never been more heated.Here’s an exchange between Goldman Sachs’ Abby Joseph Cohen and PIMCO’s Bill Gross over profit growth expectations. From Barron’s:
What is your S&P 500 earnings estimate for 2013?
Cohen: Consensus estimates for earnings growth are on the order of 12% to 13% this year and next. Corporate performance has diverged from the economy’s performance for many years, and that could continue. Companies in the S&P 500 are increasing their exposure to other parts of the world, not just for production purposes, but more important, in terms of end demand.
Gross: Time out, people. Let’s try to analyse why earnings have done so well in recent years. Corporate profits have come at the expense of labour. Wages as a percentage of GDP have declined to 54% from 59% in the past 10 years. That trend would have to continue for earnings to keep going up. Also, 30% to 35% of earnings growth in the past five years has come from lower interest expense. Most of you probably would agree that is coming to an end, as well. Corporations have to sell their products to somebody. They can’t benefit when that somebody has depressed wages and high leverage. At some point the game begins to change. A forecast of 12%-to-13% earnings growth under such circumstances is not only extreme but almost farcical.
Cohen: I gave you bottom-up estimates [industry analysts’ estimates]. Our top-down number [market strategists’ estimates] is lower, but still in the mid- to high single digits. That is much better than many people, Goldman Sachs included, felt 12 months ago.
Indeed, that data shows that stock pickers (i.e. bottom-up analysts) tend to be more bullish than strategists (i.e. top-down analysts).
It’s worth noting that Gross, the bond king, wasn’t safe from jabs either. Here’s Brian Rogers:
Rogers: …One thing we haven’t talked about is the great rotation: money coming out of Bill Gross’s portfolio and going into the equity market.
Gross: Sorry, that hasn’t happened.
Rogers: It hasn’t happened, yet. It will be a factor in boosting equity returns this year, unless investor sentiment turns very negative, which could be a risk next month as the debt-ceiling fight gets under way. That is going to be a mess, and February probably will be the worst month for stocks. But a combination of decent economic performance, reasonable valuations, and decent dividend activity suggests stocks could do well this year. Dividend growth substantially outpaced earnings growth last year, and there were a number of special dividends toward year end before tax rates were slated to rise…
Barron’s Roundtable is always a must read. Read it at Barrons.com.
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