US stocks Fastest earnings growth since 1994

• tanvi_singh
• March 12, 2010

Laszlo Birinyi will never forget the moment a year ago when the last ounce of confidence disappeared. Everyone from billionaire Warren Buffett to New York University Professor Nouriel Roubini was convinced that the economy was in a free-fall , that exploding deficits would devastate the dollar and that home prices were heading down as much as 20%.

“At turning points, the mood is always in one direction,” says the 66-year-old Birinyi, who characterised the “total conviction” of pessimists as the start of an advance that would end up making Barack Obama’s first year in office the best for shareholders in 76 years. What’s more, the Standard & Poor’s 500 Index, which gained 69% in the past 12 months, is nowhere near its peak in a rally that may persist through the next presidential election, he says.

Taking advice from Birinyi, Barton Biggs of Traxis Partners and Leuthold Group’s Steve Leuthold would have turned $1,000 invested in the S&P 500 into about $1,690 by the one-year anniversary of the bottom this week. All of them remain bulls, saying stocks will advance as the economy gains momentum and the fastest earnings growth since 1994 lures Americans from bonds.

More than $8 trillion in US government stimulus stabilised the financial system and restored $5.95 trillion to equities since March 9, 2009. Shares jumped as the Federal Reserve kept its target rate for overnight loans between banks near zero and worker productivity climbed at the fastest rate in seven years.

For Obama, gains in stocks and bonds may be the best evidence his policies are working after losses tied to subprime mortgages spurred a crisis that erased $11 trillion from equity markets and sent unemployment above 10%. While the world is focused on his efforts to pass health-care reform, overhaul the financial system and improve education, financial markets are showing growing confidence in US assets.

As stocks rallied, US investment-grade corporate bonds measured by Bank of America Merrill Lynch indexes have returned an average of 34% since bottoming in October 2008, while the Treasury succeeded in selling $2.92 trillion in securities to help finance a budget deficit estimated to reach a record $1.6 trillion in the fiscal year ending September 30.

While Buffett never stopped buying and profit at his Omaha, Nebraska-based Berkshire Hathaway rose 61% to $8.06 billion in 2009, New York University’s Roubini and David Rosenberg of Gluskin Sheff & Associates were proved wrong as shares surged. Both said on March 9, 2009, that the S&P 500 was at risk of falling at least 10%. Roubini, who forecast the credit crisis, declined to comment. Rosenberg, then working for Charlotte, North Carolinabased Bank of America, said this will likely turn out to be a bear-market rally.

• Last Modified: March 12, 2010
• Filed Under: Latest News, MARKETS, NATION, WORLD