EARNINGS ESTIMATES ARE A MAJOR MARKET HURDLE

EARNINGS ESTIMATES ARE A MAJOR MARKET HURDLE

Courtesy of The Pragmatic Capitalist

As the Q4 2009 earnings season comes to a close it’s important to take a look at the overall earnings picture. With over 98% of the S&P 500 reporting it looks like Q4 earnings will come in a little shy of $16.80. As we fully expected the analyst’s estimates once again proved to be well below the mark as 72% of all companies outperformed expectations.   This has resulted in substantial estimate increases and has been one of the primary reasons why we have maintained that investors could not short this market for the entirety of the last year.  The earnings upgrade cycle has served as wind at the market’s back, but the optimism is now becoming an impediment.

In the last year analysts have substantially contributed to the equity rally as they upgraded stocks and increased their estimates.  The “Monday upgrade” rally has become a hallmark of the move higher in stocks as analysts spend their weekends adjusting estimates and preparing for Monday morning upgrades and downgrades (though mostly upgrades).   In just the last 8 weeks analyst’s Q1 2010 estimates have jumped 4%.   In addition, they are growing increasingly optimistic about the latter portion of the year (where I believe things get potentially messy).   The H2 estimates have continued to creep higher as Q4 earnings were released.  Analysts are now calling for $78 in operating earnings for FY 2010.  The 2011 estimates have also surged.  Analysts now expect $94 in operating earnings for 2011.  That would represent back to back years of 20% earnings growth - something that has never happened before in the history of the United States equity market.

The real problems lie in the latter portion of 2010.  Analysts are currently calling for 38% year over year growth for Q2, 30% year over year growth in Q3, and 27% growth in Q4 2010.  Granted, these are coming off of easy comps, however, we have yet to see any real revenue growth.    Including the very easy comps with financials, sales grew just 5% year over year in Q4.  If we exclude the financials revenue growth was nearly non-existent at just 1.1% year over year.   This is best visualized in the image below which shows the S&P 500 by revenue per share.  The trough is clear, but there is certainly no v-shaped recovery here.  At best, we are bumping along the bottom.

We are well into…

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