Late last year, everyone knew that the earnings estimates for the
SP 500 based on individual company forecasts by analysts were too
high. So, S&P took it upon itself to put all of the estimates under
review. The regular weekly update was suspended to accomodate
said review. For Q4 '08, I was well under consensus with an
estimate of $10.00 for the quarter. On 2/2, S&P published $8.19
and then one week later, came $6.33 with about 80% of the reports
in the can. Sweet Jesus, that came as a surprise, especially since
peak net per share of $24.07 was notched in Q2 '07.
Close to half of the decline in Q4'08 eps compared to that of Q4 '07
reflected an acceleration of financial sector red ink, with the
remaining 9 sectors down 21% in toto. The lower band for the
trend of earnings since the latter 1980s was $15.00 per quarter,
so the dramatic decline for the recent quarter represents a major
blowout and certainly suggests a probable new epoch of more
restrained earnings growth and profitability.
The decline in earnings for the non-financial sector has so far been
mundane and not alarming. However, this broad sector could well
see significantly weaker earnings over much of the first half of ' 09
as the full brunt of a broader, deeper recession is felt. As well,
the accountants have let many non-financials take large
"nonrecurring" write downs which in effect inflates operating eps.
In fact, total earnings as reported for the 500 companies and
which includes the writeoffs, could well be in the red for Q4 ' 09 --
an historic first for any period.
There is a temptation for investors to "low ball" eventual recovery
earnings. However, the positive earnings leverage for non-financials
is enormous when a global economic recovery takes hold. The
financials, now mired in deep red ink, are holding net revenue, and
have extraordinary positive earnings leverage once loan / securities
losses peak and begin receding. That leverage will outweigh the
effects of dilution to be expected when market conditions improve
enough to allow this sector to re-capitalize.
So, we have extremely depressed corporate earnings currently,
with the potential for a large bounce up once economic recovery takes
hold. Clearly, investors are not treating quarterly eps of $6.00 - 8.00
as the new norm, but are pricing in a substantial recovery in
earnings over much of 2009 and going into 2010. And further,
players are assuming the banking sector will be repaired enough to
provide normal assistance in an economic expansion.
Right now, we are a ways from recovery. I say Half 2 '09. Plenty of
others see no economic recovery until 2010 or even later. Some have
us in a deflationary "death spiral" that could spell a long, perilous
depression.
Oops! I have to add another no-no to my list. The other week I
added the price of gold to my grandad's list of things not to argue
about ( He fingered politics and religion). I'll add the economic
forecast to that list. Thus I leave the reader at full liberty to
his or her own economic view. But, I do have a sobering point
here: Earnings are being badly mauled in the short run, and even
if you are more optimistic such as I, you have to have a strong
regard for how bad things did turn in recent months.
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