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Wall Street Optimism: S&P 500 Sales Forecast Doubles Amid Stagnant Margins

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Despite a slew of negative economic reports in recent weeks, analysts are increasing sales forecasts for Standard & Poor’s 500 Index companies. Bloomberg reports the increase could be most in three years.

Revenue will climb 10% in 2011, twice last year’s rate, as personal income and corporate spending recover, according to data from analysts compiled by Bloomberg. Net margin estimates were unchanged the past two months after rising more than 50% since 2009. The measure of income divided by revenue increased to 13.4% in the first quarter from 8.2% in October 2009, Bloomberg data show.

Companies that boosted profits by firing workers and closing factories in the first two years of the expansion are running out of opportunities to reduce costs, requiring sales gains to keep growing. While bears say U.S. businesses will fail to increase revenue fast enough to justify higher stock prices, chief executive officers at Caterpillar Inc. and Coventry Health Care Inc. have raised forecasts.

“In the early part of the recovery, the CEO focuses on efficiency, productivity and margin enhancing, until their sales kick in,” James Paulsen, chief investment strategist at Wells Capital told the news service. “Once that happens, that emphasis on margins starts to fade. What looks on the surface as something you’d check off as bad is actually an indication that things are getting better.”

The 10% increase analysts predict compares with 5.2% last year and a decline of 9.1% in 2009.

Personal income for Americans increased 0.3% in May for the second month, according to Commerce Department data Monday. Income is rising at an average rate of 0.5% a month in 2011, versus 0.3% in 2010. Capital spending by companies in the index may jump 21% this year, according to the median estimate of analysts compiled by Bloomberg. Retail sales excluding cars increased 0.3% last month, topping economist predictions for a 0.2% gain, the data show.

Revenue gains may push S&P 500 profits to $99.08 a share this year, up 17% from 2010, after rising 37% a year earlier, the biggest two-year expansion since 1995, analyst estimates compiled by Bloomberg show. The gauge has traded at an average 15.7% reported earnings since the start of 2010, or 15% below the average for the rest of the past 10 years.

“We had two years where every data point was stronger than the next one, and earnings were just marching back to all-time peaks,” AdvisorOne contributor Jeffrey Kleintop, chief market strategist at LPL Financial Corp. told the news service. “It’s great, but that pace of growth is unsustainable, and ultimately you get to the point where businesses do need to reinvest to generate growth.”

“We are downshifting to a more normal mid-cyclical environment,” said Kleintop. “That’s a good thing, it sustains the recovery. Even as profit margins might be stable or even falling, stocks will do reasonably well because people believe the growth is going to continue, even if at a slower pace.”