Monday, 21 January 2008

How Low Can 4Q07 Earnings Go?

Financial stocks had a horrible earnings week last week with almost all missing market expectations. As a result S&P500 operating earnings are now estimated to show a -13.6% decline for 4Q07. Expectations can change quickly, only 4 months ago 4Q07 earnings were expected to show double digit growth.

1Q08 and 2Q08 estimates are inching lower, now expected to show earnings growth of 3.3% and 3.2% respectively. Expect those expectations to turn negative in the coming months. 4Q08 forecasts are looking more and more attractive as 4Q07 forecasts keep getting slashed but that will be eventually be revised closer to reality.

Also FY08 forecasts are still way too high projecting 16.2% growth. With 2 negative quarters back to back we have an earnings recession. Last time there was an earnings recession (shown on the graph below by the huge 40% drop in 2001 earnings ) there was an economic recession, fancy that.

An economic recession accompanied the earnings recession in 1990-91. Earnings turned negative for just one quarter in 3Q98, that did not result in an economic recession. What's the bet the current earnings recession will be coupled with an economic one?