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Analysts Forecasts Remain Too High

Wednesday, October 15, 2008 | 09:00 AM

Well, now that we got THAT unpleasantness behind us, its time to look forward to earnings season! Its not going to be pretty. The question is from these still depressed levels, will there be any further damage wrought.

On that exact subject, I hope in the midst of the recent market activity, you did not overlook this article about earnings expectations. Its the key to where markets will eventually find themselves after the current bailout mania subsides.

As we have repeatedly harped upon this year, the analyst community is still way too bullish when it comes to S&P500 earnings consensus.

"Investors who are expecting a rebound after almost $7 trillion was erased from U.S. equity markets this year may be disappointed as earnings fail to match forecasts. S&P 500 companies that earned less than analysts estimated in the past year dropped 13 times more than the index's average decline, data compiled by Bespoke Investment Group LLC show...

Operating profit at S&P 500 companies fell 7.5 percent last quarter and will jump 28 percent this quarter, led by banks and brokers, according to analysts' estimates compiled by Bloomberg. That would exceed the record $222 billion they earned in the April-June period last year.

Six of 10 industries will report record profits or come within 5 percent of all-time highs, according to Wall Street projections, which are usually based on company outlooks.

"The consensus will have to go down significantly,'' said John Praveen, Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which oversees $638 billion. "The numbers are way too high.''

Indeed.

The Street is at $95, and I am at $65 . . . times a 15 multiple means we are actually near fair value. As long as earnings don't fall even below my pessimistic forecast -- and multiple compression doesn't rear its angry little head.

If that happens, all bets are off . . .

Previously:
Pricey Markets? (September 03, 2008)
http://bigpicture.typepad.com/comments/2008/09/pricey-markets.html

Analysts Overstate Earnings Once Again (July 30, 2008)
http://bigpicture.typepad.com/comments/2008/07/analysts-overst.html

S&P500 Profits Ex 3 Oil Cos = Awful (May 19, 2008)
http://bigpicture.typepad.com/comments/2008/05/sp500-ex-energy.html

Source:
U.S. Stock Analysts Keep Estimates as Markets Fall
Michael Tsang
Bloomberg, Oct. 13 2008
http://www.bloomberg.com/apps/news?pid=20601010&sid=aOp.zaooow_I&

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Comments

Before the dot-com days, someone who used a 15x P/E was considered a moderate, reasonably cheery optimist, kind of like a moderate Republican then would be considered a liberal Democrat now. If I recall the old idiom, the P/E should be roughly equivalent to the annual growth rate of a company (I believe either top line or bottom line could be used), which means to justify your 15x P/E, the entire S&P would have to grow at 15% annually. I suspect your recent mean-variance experiences - despite having read Taleb - is causing you to be optimistic on earnings as well.

Dow 6000 (7000 with Obama, 4000 with McCain, probability adjusted)

Posted by: CNBC Sucks | Oct 15, 2008 9:15:50 AM

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