Salient to Investors:

Profits are moving U.S. equity prices more than any time since the bull market began 3 1/2 years ago.

Bloomberg data show:

  • S&P 500 companies rose or fell an average of 4.4 percent the day after releasing results since July. Daily swings in the index narrowed to 0.4 percent in August versus 2.2 percent a year ago.
  • Profits exceeded estimates by 4.5 percent on average last quarter, versus 6.2 percent in the prior period. Analysts expect profits to rise 11 percent in Q4 2012, rise 11 percent in 2013, and rise 12 percent in 2014.
  • Flat earnings in March-to-June period, the first non-growth since 2009. The S&P 500 P/E ratio rose 2 percent to 14.3 versus the five-decade average of 16.4.

Chris Hyzy of U.S. Trust expects S&P 500 profits to reach $100 a share this year versus the $103.1 average of more than 10,000 estimates: not as high as expected and the market should fade.

Birinyi Associates said:

  • Greater sensitivity to earnings is reducing the degree by which stocks rise and fall in unison – the correlation coefficient for S&P 500 companies fell to 0.58 on Aug. 31, down 14 percent from a month ago. For data back to 1980, correlation hit a record 0.86 percent in October following the S&P downgrade of  the U.S. government’s AAA credit rating.
  • The link among stocks usually increases when the market is falling. The last two times correlation rose above 0.8 coincided with the bull market’s biggest retreats.

Individuals withdrew money from US equity mutual funds for a fifth year in 2011, the longest streak going back to 1984, and more than $420 billion over the past four years. Investors added $200 billion to bond funds this year, $910 billion since March 2009.

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