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Analysts try to be upbeat in uneasy stock scene

Job growth in the United States is slowing. Sales at stores have stopped growing. The economies of India, Brazil and China are cooling. Europe is crippled by government debt and bad bank loans.

But there's not much to worry about -- at least if you ask the Wall Street analysts who give advice on which stocks to buy and sell.

This famously cheery group says earnings at the biggest U.S. companies, which appear at a standstill today, will start growing again this summer, then leap by 15 percent in the last three months of 2012 from a year earlier.

To investors who believe these stock analysts -- and who think that stocks are therefore a bargain -- some veteran market-watchers have a word of warning, or rather two: You're dreaming.

"Unless something miraculous happens, like all of a sudden Greece is wonderful, I don't see how we get 15 percent," says Christine Short, a senior manager at S&P Capital IQ, a research firm.

Says Brian C. Lazorishak, portfolio manager at Chase Investment Counsel: "To get there, you almost need an acceleration in economic growth. How and where does that come from?"

Don't ask the economists. They've been cutting estimates for economic growth, not raising them. The stock analysts don't appear to have noticed. For months, they've been telling investors to buy stocks because they're cheap.

The figure cited most often is the so-called forward price-earnings ratio, which is a company's stock price divided by the earnings per share expected over the next 12 months. A lower ratio suggests that stocks are cheaper.

For companies in the Standard & Poor's 500, the ratio is 12.3 times, compared with a 35-year average of 12.9. This suggests that stocks are reasonably priced. But if the earnings forecasts prove too high, stocks could look less appetizing, or even expensive.

It wouldn't be the first time that analysts misled investors.

In June 2007, analyst estimates for the next 12 months had the S&P 500 trading at 16 times earnings per share. By the end of the year, the economy was in recession, and the forecasts turned out too high. Analysts slashed them, but stocks were already dropping.

As it turned out, based on earnings that companies ended up generating, stocks had been trading in June at an expensive 22 times earnings per share.

Analysts are notorious for taking a long time cutting forecasts. In January, they predicted that earnings for the April-June period would rise by 4 percent from a year earlier, according to S&P Capital IQ. Now they say earnings will fall by 0.5 percent for that period.

The same pattern is playing out for the July-September quarter, too. Analysts think earnings will be up by 4 percent, down from their estimate in January of more than 7 percent.

S&P's Short says she's impressed with how closely the analysts are holding to their 15 percent call for last three months of the year.

Part of the reason for the stubborn sunniness may be that analysts take their signals from the companies they cover, and Short says that many companies have chosen to be vague about their prospects for later this year.

The few that have gotten specific have found investors in a less than forgiving mood.

Last Wednesday, Scotts Miracle-Gro, a maker of lawn and garden products, cut its estimates for the year, and investors pushed its stock down by 6.6 percent. Friday, it was AAR Corp.'s turn to get slammed. The defense contractor said that it might not earn as much as expected, and its stock plunged by 7 percent.

The backdrop is a quickly darkening economic picture.

Last week, the government reported that in May, shoppers spent less at stores for a second straight month, the first back-to-back decline in two years. That followed news that companies cut orders to factories for a second month in row and have pulled back on investment plans.

Earlier in the month, the government said employers added just 69,000 jobs in May, the fewest in a year. Not surprisingly, economists at JPMorgan Chase, BNP Paribas, UBS and other banks have been cutting estimates for U.S. growth this year.

Some of the bullishness by stock analysts rests on companies whose earnings are tied to rising commodity prices. But lately those prices have been moving in the opposite direction, and sharply. Copper, cotton, aluminum, platinum, you name it -- all are down this year. The most widely watched of commodities, oil, has dropped by 15 percent.

Analysts expect earnings at energy companies such as Chevron and ExxonMobil to increase by 17 percent in the last three months of the year versus a drop of nearly 7 percent in this quarter. Earnings of materials companies such as Alcoa, an aluminum manufacturer, are somehow expected to rise by 40 percent in the last three months, though they're expected to drop by nearly 11 percent in this quarter.

David J. Kostin, a strategist at Goldman Sachs, thinks earnings for the S&P 500 will barely grow from here, eking out maybe a 3 percent gain for the year, less than half what the typical analyst projects.

Using his figures, the S&P 500 is trading at 13.4 times earnings per share over the next 12 months, slightly above its 35-year average.

Kostin expects the S&P 500 to end the year at 1,250, down by 7.9 percent from Tuesday's close of 1,357.98.

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