S&P 500 Sees Biggest Increase in Profits Since 1900

The index's earnings are poised to surpass 2007 peak

The biggest increase in profits in more than a century is telling investors that this is no time to sell stocks, even after the Standard & Poor’s 500 Index rallied 97%.

S&P 500 earnings are poised to surpass the 2007 peak of $90 a share in the third quarter after surging from $7 in March 2009, the quickest recovery since at least 1900, according to data from S&P and Yale University’s Robert Shiller compiled by Bloomberg. The gap between projected 12-month profits and average earnings over the last 10 years is set to widen the most since 1951, according to Bloomberg.

Bloomberg quotes PNC Wealth Management, Federated Investors Inc. and ING Investment Management, which together oversee about $1 trillion, who say consumer spending will sustain the recovery after government stimulus helped lift profits from the lowest level since the Great Depression. While earnings will slow in the second half, stock purchases by investors who missed the S&P 500’s advance will fuel gains, according to Leuthold Group LLC.

“People are more comfortable with the recovery than at any time over the last couple of years,” Doug Ramsey, the Minneapolis-based director of research at Leuthold Group, told Bloomerg. “That’s typically when retail investors regain courage,” and may spur a rise of up to 25 percent in the S&P 500 during the next 18 months, he said.

The S&P 500 rose 1.4% to 1,332.41 last week, bringing its 2011 advance to 6% and putting it 0.8% away from this year’s high of 1,343.01 on Feb. 18. It slumped through March 16 following Japan’s record earthquake and civil unrest in the Middle East and northern Africa. The gauge’s gain since March 9, 2009, is the most over comparable periods since 1937, according to S&P’s Howard Silverblatt.

Shares haven’t kept up with earnings. S&P 500 companies’ 12-month profits are projected to reach a record $91 a share by August, according to estimates compiled by S&P and Bloomberg. That would be the highest-ever level on an inflation-adjusted basis and up almost 13-fold from their low two years ago.

The 50-month rebound in profits, following a 92% drop during the global financial crisis, would be faster than the 52 months it took to recover from the bursting of the dot-com bubble in 2000, when earnings fell 55%, the data show. Profits didn’t recoup their 67% tumble during the Great Depression until 19 years later.

American International Group Inc. (AIG), the New York-based insurer bailed out by U.S. taxpayers, has posted the biggest turnaround since March 2009. AIG swung from a trailing 12-month loss of $95.8 billion to net income of $7.79 billion, according to Bloomberg.

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