By Eric Martin and Michael Tsang
July 7 (Bloomberg) -- Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor's 500 Index will gain the most in 26 years during this year's second half. That isn't going to happen, if history is any guide.
The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.
Even if that happens, it may not be enough. In 2001, the last time profits fell as much, they then had to climb for three straight quarters before stocks rebounded. Analysts' earnings estimates for this year still represent a decline from 2006 levels, making the strategists' optimism harder to justify, investors say.
``If they're accurate, I'll give them a big kiss,'' said Randy Bateman, who oversees $15 billion as chief investment officer at Huntington Bancshares Inc. in Columbus, Ohio. ``I don't think those are very realistic figures.''
The S&P 500 dropped 1.2 percent last week to 1,262.90, coming within a percentage point of a ``bear market,'' defined as a 20 percent plummet from its peak in October. Based on the index's closing price of 1,280 on June 30, the average strategist forecast of 1,515 by year-end calls for the biggest rally of any second half for the S&P 500 since Ronald Reagan was in the White House in 1982.
Unrepentant Bull
Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank's New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.
Ian Scott, Lehman's global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent.
The S&P 500's rebound ``is going to be one of the greatest roars we've seen,'' Bianco said. ``The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen.''
Strategists' annual forecasts have been off by an average of 14 percentage points since 2000, according to data compiled by Bloomberg. They haven't projected an annual decline in at least eight years.
`Monkey With Abacus'
At the start of the year, strategists told clients to expect an average 11 percent advance in the S&P 500 in 2008 to 1,634, Bloomberg data show. The measure has dropped 14 percent so far.
``A monkey with an abacus is probably better at the end of the day,'' said Peter Sorrentino, a Cincinnati-based senior money manager at Huntington Asset Advisors, which oversees $16.7 billion. ``To read the strategists' input is intriguing and thought-provoking, but at the end of the day, you'd better have your own tools. We're nowhere near as optimistic as some of the forecasts.''
The U.S. housing slump, the worst since the Great Depression, will drag down economic growth and profits, and limit share gains, Sorrentino said.
The economy grew 0.45 percent last quarter, according to economists surveyed by Bloomberg. Employers cut jobs for a sixth consecutive month in June, the longest string of payroll declines since the last recession, while service industries shrank, signaling the slowdown may deepen.
Alcoa Kickoff
Profits at S&P 500 companies fell for three straight quarters and are estimated to have dropped 11.2 percent in the second quarter, according to data compiled by Bloomberg. Four consecutive periods of declines would be the most since the last recession in 2001.
Alcoa Inc., the world's third-largest aluminum producer, kicks off the second-quarter earnings season tomorrow. The New York-based company earned 67 cents a share, 17 percent less than a year earlier, according to consensus estimates.
In the third and fourth quarters, analysts expect average profits for S&P 500 companies to increase by 10.5 percent and 49.8 percent. Financial firms -- the hardest hit by the collapse of the subprime mortgage market, with more than $400 billion in credit losses and writedowns globally -- are forecast to report a gain of more than fivefold in the final three months.
Last quarter, earnings at banks, brokerages and insurance companies probably fell 60.1 percent. Under the analysts' projections, profits at U.S. companies would increase by 5.6 percent for the full year.
Paying It Forward
``Earnings in a lot of sectors should look good,'' said James Swanson, Boston-based chief investment strategist at MFS Investment Management, which oversees $204 billion. He expects the S&P 500 to gain 23 percent to 1,580 by Dec. 31. ``Financials should be making money again. There's certainly a lot of wreckage now, but there are bargains out there.''
The Federal Reserve's most aggressive interest rate cuts since the 1980s will lift the market as the benefits for businesses and consumers start to be reflected in share prices, Swanson said. The Fed has lowered the benchmark rate by 3.25 percentage points to 2 percent since September.
Shares may still drop even after earnings recover, which is what happened during the last recession. The S&P 500 lost 13 percent during the five quarters of profit declines between 2001 and 2002. In the last three quarters of 2002, when earnings increased again, the index fell a further 23 percent.
``There's always going to be ebbs and flows in the economy, but we believe that this is a start of a significant bear market,'' David Tice, founder of the $1.2 billion Prudent Bear Fund, said on Bloomberg Television. ``We are going to pay the price for it with much lower stock prices.''
To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.
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