It looks like the perenially optimistic analyst community is finally getting the message that the recession will be nasty. From Bloomberg:
Analysts are slicing profit forecasts for U.S. companies in the fourth quarter and 2009 as third- period results miss projections at the highest rate in almost 11 years.
“Estimates have been coming down with a vengeance,” said Dirk van Dijk, director of research at Zacks Investment Research Inc. in Chicago. “It’s just plain ugly out there.”
Companies in the Standard & Poor’s 500 Index may see fourth-quarter earnings advance 15 percent, down from 42 percent projected at the end of August, according to a Bloomberg survey of analysts’ estimates. Profits in 2009 may grow 13 percent, analysts say now, compared with the 24 percent predicted two months ago.
Financial firms worldwide have posted almost $700 billion in credit-related losses and writedowns since the beginning of 2007, in the worst economic crisis since the Great Depression. The S&P 500 is down 35 percent this year, headed for its worst annual performance since 1937.
“Wall Street has underestimated the negative impact on corporate earnings of the ongoing global economic deterioration,” said Alec Young, an S&P equity strategist in New York. “We’re still finding out where the bottom is.”
Um, I am missing something. Analysts are still calling for earnings growth? Ooh, wait for further revisions…
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Yep, they’re still wrong, even at reduced rates of growth, but at least they’re coming down meaningfully. This is one of the things we need to see in order to begin thinking about an equity market bottom. Not yet mind you! But still, moving there.
If analysts are forecasting any earnings growth, in aggregate, this year over last year, or next year, over this year, I'd like to smoke what they're smoking, because it must be some good stuff. Check out Meredith Whitney's interview on CNBC before close of trade on Wednesday to get an idea of how far off the mark analysts have been on the financials. Even she admits that she's been too optimistic, if you can believe that! Here's the url:
http://www.cnbc.com/id/15840232?video=920170651&play=1
The S&P strategists at the major firms have brought their 2009 estimates down well below the aggregate of individual companies…analyst upgrade/downgrade cycling has been even worse than normal this year.
http://epiphanyinvesting.com/2008/11/02/barrons-notes-disparity-between-individual-company-spx-estimates/
Maybe why markets are down. Have these analysts been selling?
Yves – I suggest you comment on the Martin Hutchinson article in Money Morning. Do you think Hutchinson’s top-to-bottom GDP conclusion is close to accurate?
How could stocks be sold without upbeat earnings predictions?
I have been saying since March that large markdowns are likely to come in analyst estimates in January, once the AUDITED financials are released.
Some in the blogsphere have called that a “paranoid” school of thought.
Actually it’s a deeply rational analysis, based on quite a few data points.
Matt Dubuque
Equities purchases should be based on projected future earnings (along with other corporate specific data). Therefore, it is not in the best interests of those attempting to sell equities to forecast a decrease in earnings.
Would anyone expect an auto salesman to point out the disadvantages of an auto they are attempting to sell?
Mish has been correct about future earnings declines for a very long time. If corporations and consumers are cutting back on purchases how can honest earnings estimates do anything but decline?
Lets not go feminist on us. Moisturizer to control fairer sex. lol. I am dating coach, and i see a lot more men getting short end of the stick in dating then women, so lets not compare tomatoes with oranges.
Estimates will continue to plunge. here are a few updates from my latest Earnings Trends report (available for free at Zacks.com
Keep your focus on the trends in estimates, not on the levels! An estimate in motion tends to stay in motion. Estimates are dropping rapidly, and nearly across the board. This is particularly true for 2009 estimates where a staggering 1 in 4 S&P 500 firms saw their mean estimate fall by more than 15%, and more than 1 in 10 saw a decline of more than 25% over the last month. This means that the currently measured expectations for the fourth quarter and for 2009 are far too high. The growth rate expected for 2009 has been sustained by the expectations for 2008 dropping at a similar rate. Versus the stable base of 2007 earnings the expected growth rate has declined from 12.4% to 9.8% in just the past week. It is my personal expectation that that number will fall below 0.0% by Christmas. Similarly, due to a very weak 4Q in 2007, year over year growth in total net income is now expected to be 15.2%, but this is down from 17.7% just last week. The fact that the revisions ratios for 2008 are deeply in negative territory in the face of more positive than negative surprises is a very negative development.
Scorecard and Median EPS Growth Rates
• 392 or 78.4% of S&P Companies have reported through 11/4 close
• Surprise ratio at 1.86, median surprise at 1.95%, both somewhat below normal
• Median EPS growth at 6.90%, surprisingly good given the economic environment
• Energy (52.0%) and Tech (12.9%) and Industrials (12.8%) leading
• Financials (-29.9%) doing the worst
• Expected Growth of 7.7% for those left to report
• Health Care leading on surprise front, Financials disappointing
The Zacks Revisions Ratio: 2008
• Revisions ratio for full S&P 500 up to 0.31, from 0.27 on Thursday
• Health Care by far the strongest at 1.07 in response to earnings surprises
• Health Care accounts for 26% of all estimate increases, revisions ratio 0.21 excluding Health Care
• Cuts outnumber increases by more than 3:1 in 7 of 10 sectors
• Ratio of firms with rising to falling mean estimates at 0.27, up from 0.24
• Total number of revisions (4 week total) up to 3,857 from 3,474 on Thursday
• Increases up to 913 from 763, cuts up to 2,944 from 2,711
The Zacks Revisions Ratio: 2009
• Full S&P 500 2009 revisions ratio up to 0.13 from 0.12 on Thursday
• More than 10 cuts per increase for 7 sectors
• Health Care the “best” at a 0.46 reading
• Ratio of rising to falling mean estimates down to 0.11 from 0.13
• Total number of revisions up to 3,707 from 3437 on Thursday
• Increases up to 412 from 378, cuts up to 3,295 from 3,059
• Size of cuts horrific: 25% of all S&P firms 09 estimates down more than 15% over last 4 weeks, 11% down more than 25%
• Only thing holding up 2009 expected growth is the decline of 2008 base
Market Cap versus Total Earnings
• S&P 500 P/E for 2008 12.8 and 10.8x for 2009
• Forward Earnings Yield of 8.84% wildly attractive relative to 10 year T-Note of 3.69%
• Real P/E’s are higher (and earnings yields lower) since the “E” is still way to high
• Financials expected to get 6.2% of total S&P earnings in 2008, down from 21.6% in 2007, rebound to 15.5% expected for 2009, currently represent 14.6% of total market cap
• Energy’s share expected to grow to 22.2% of total in 2008 from 15.6% in 2007, expected to recede to 18.2% in 2009. Sector represents just 12.8% of the index market cap
• All sectors but Financials and Consumer Discretionary expected to lose earnings share in 2009, although both will be below 2007 shares
• Energy P/E by far the lowest for both 2008 and 2009, at 7.3x and 7.6x, respectively