U.S. company earnings fuel opportunities

Putnam U.S. Equities Team, 5/20/13

Today, while investors have lower expectations for revenue trends, there is potential for mid- to high-single-digit earnings growth. Considering the current level of valuations, our outlook is fairly constructive for corporate earnings in 2013.

For some time, our theory has been that if S&P 500 companies could deliver earnings of $100 to $110 per share, and price-earnings ratios stayed around their historic average levels, we would see the S&P 500 Index exceed 1500. Now that this has played out, what does it take for the market to go higher?

https://www.putnam.com/static/img/blogs/perspectives/CorportateProfits-AfterTax_chart.jpg

Either investors need to be willing to pay higher multiples, or earnings must reaccelerate. While the first is definitely possible, it's not something that can be counted on. There is greater cause to be optimistic about the latter scenario, particularly in light of better economic conditions in Europe and China.