April was an historic month. Volcanoes, Greece, Goldman Sachs and Oil spills dominated the headlines and our conversations with clients. With so much bad news in abundance, one would have imagined that the stock market would be down significantly. In fact, the TSX and the Dow were each up 1.4% for the month. The gain is all about earnings.
Over 77% of S&P 500 companies have exceeded analyst earnings expectations. What makes this statistic so remarkable is that after such a good 2009 fourth quarter earnings performance for S&P 500 companies, analysts rushed to raise their earnings targets for 2010. Some analysts now expect the S&P 500 to have combined earnings of $90 per share in 2010 and $100 per share in 2011. Using a conservative price/earnings multiple of 15 times, gets us targets of 1,350 to 1,500 for the S&P 500 index, much higher than its current level of 1,190. The TSX is also undervalued and targets of 13,500 to 14,375 are reasonable given much improved corporate profits.
Even with the headwinds of a rising Canadian dollar as well as interest rates, we continue to believe that stocks look inexpensive and investors should continue to increase their holdings.