Tuesday, 29 April 2008

Analysts Still Playing Catch-up With Earnings

As stated ad-nauseum here analysts are typically behind the curve at turning points in the earnings cycle. The graph above certainly bears that out. 6 months ago 1Q08 S&P500 operating earnings were projected to show a 9.1% increase. As late as the end of February, operating earnings were still projected to be marginally positve for 1Q08. As of last week they are expected to be down -12.6%. Also for the first time 2Q08 earnings are now expected to be down -5.1%.

Also 3Q08 operating earnings projections have come down in the last fortnight from 19.9% to 15.5% and 4Q08 has come down from a ridiculous 73.6% to a slightly less ridiculous 69.1% . However, whilst analysts are getting more realistic they still have their heads in the clouds for 3Q08, 4Q08 and beyond. The chart below lends credence to that idea.

As seen above in the two previous earnings cycles, earnings took about 4 years to recover to previous highs. Analysts expect earnings to recover in just 1.25 years. As always, I am open to the possibility that "this time will be different", but given the historical nature of previous earnings cycles, it is highly unlikely. It is also unlikely that a protracted earnings slump of 4 years is priced into the stockmarket.