Monday, 28 January 2008

S&P500 4Q07 Earnings Forecasts Plunge

Last week I posed the question; How low can 4Q07 earnings go? The answer as of last Wednesday is -21.2% according to S&P. That puts FY07 earnings firmly into negative territory at -3.5%.

As 4Q07 S&P500 earnings forecasts continue to be slashed, 4Q08 projected earnings growth continues to increase. That's not because analysts are raising their 4Q08 forecasts but rather because they are cutting their 4Q07 numbers much more than 4Q08. 4Q08 earnings may well be positive but it will be a far cry from what is being currently projected.

4Q08 growth is now expected to be 53%. That will prove to be way too high. The chart below shows that quarter over quarter earnings growth has never exceeded 35%. in the last 20 years. That's not to say quarter over quarter earnings can't exceed 35% but rather that is highly unlikely.

4Q08 has a long way to go before it gets anywhere near reality and by implication FY08 numbers also need to come down. Also 1Q08 and 2Q08 growth forecasts are now nearing flat at 2.1% and 1.9% respectively. Expect them to go negative before the end of the first quarter.

The chart above shows that earnings expectations have fallen to levels seen only twice in the past 20 years. Both of those periods were characterized by economic recessions.

In the past couple of weeks, there has been talk of too much pessimism in the markets. However earnings expections beyond 4Q07 don't reflect pessimism. In fact they are still far too optimistic.