Standard & Poor’s 500 Index companies are exceeding analyst sales forecasts by the most since 2012, a sign rising consumer demand is fueling economic growth as the bull market approaches its sixth year.
Led by banks, utilities and drugmakers, sales beat analyst predictions by 1.2% this earnings season, the highest margin in almost two years, according to data compiled by Bloomberg. The performance came as economists raised their estimate for GDP expansion to 2.9% in 2014, up from 2.6% at the start of the year, even after snowstorms helped lead to lower-than-projected data on retail sales and payrolls.
The combination will lift earnings enough to fuel more gains for the S&P 500 as manufacturing improves and employment recovers, according to Jonathan Golub, the chief U.S. market strategist at RBC Capital Markets LLC. He sees the S&P 500 climbing 13% from last week’s close to 2,075 this year. Companies from Regeneron Pharmaceuticals Inc. to Nvidia Corp. surpassed revenue forecasts in the fourth quarter by twice the rate as the previous period on stronger-than-estimated demand for everything from drugs to computer chips.
“We’re starting to see revenue growth in a lot of companies as we sift through all the rubble,” Dan Veru, chief investment officer who helps oversee $5 billion at Palisade Capital Management LLC, said by phone. “The best news in that is that those sales expectations are low. And when expectations are low companies have a tendency to beat those expectations.”
The S&P 500 advanced 2.3% last week as comments by Federal Reserve Chair Janet Yellen fueled optimism the economy can weather further stimulus cuts and Congress voted to increase the nation’s debt ceiling. While the increase in payrolls trailed economists’ estimates in the first two reports of the year and retail sales excluding automobiles and gasoline unexpectedly decreased in January, the U.S. has added jobs for 40 straight months and that measure of sales has increased in every month but two since the middle of 2012.
Revenue growth is more important than at any time since the bull market began as profit margins at American companies climbed to all-time highs above 9%, limiting the potential earnings boost available from cost cuts. McDonald’s Corp., the world’s biggest restaurant owner, and Nike Inc., the largest sporting goods company, signaled margin gains will be harder to come by this year.