Posted by Joseph Y. Calhoun, III

In my recent market update, I said:

I don’t know (and neither does anyone else) how much higher the market can carry, but I suspect it will be quite a bit higher than most expect. Earnings estimates are probably still too low and market sentiment is still too negative. Critics have complained that cost cutting is the source of higher earnings and therefore can’t be duplicated, but my guess is that these same critics are probably underestimating the effects of monetary and fiscal stimulus. GDP growth coming out of this recession, for a variety of mathematical reasons, is likely to be much better than expected. In the past, recoveries have been symmetrical with the depth of the recession and I see no reason to believe this time will be any different. So, I’ll go way out on a limb here; my target for the S&P 500 is  1100 - 1200.

Here’s some evidence that analysts are doing exactly what I expected - raising earnings estimates:

July 27 (Bloomberg) — Analysts are raising U.S. profit estimates for the first time since credit markets froze two years ago, reducing valuations even after the steepest rally since the Great Depression.

Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.

The failure to anticipate Goldman Sachs Group Inc.’s record second-quarter profits or Freeport-McMoRan Copper & Gold Inc.’s tripling of bullion sales forced analysts to boost 2010 projections. Wall Street firms estimate the S&P 500 will earn $74.55 a share next year, up from $72.54 in May. Stocks traded at 13.13 times estimated profit at the end of last week, indicating a 26 percent increase in the S&P 500 should the index return to its five-decade average of 16.54 times annual income.

If the market does rise to that long term P/E, the S&P 500 would rise to 1232. That’s just a little higher than the high end of my expected range and I wouldn’t rule it out.

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