Tuesday, June 26, 2012

S&P 500 Forward Earnings

The next earnings season is about to begin. Industry analysts have been curbing their enthusiasm for Q2-2012 results since the end of Q1. They’ve lowered their S&P 500 estimate for the current quarter from $26.11 during the week of March 30 to $25.38 during the week of June 21. That would put the quarter up only 5.2% y/y, the weakest since the end of the recession. Over the same period, they’ve also cut their estimates for Q3 and Q4.

The consensus bottoms-up forecasts for 2012 and 2013 are down to $105.07 and $117.94. Forward earnings, which is the time-weighted average of the current and coming year estimates, has recently flattened out around $111.26. That’s actually quite bullish since forward earnings tends to be a very good leading indicator of actual S&P 500 operating earnings over the coming year. If so, then actual earnings should add up to about $110 from now through mid-2013. I am forecasting $110 for next year, so I feel very comfortable with the latest forward earnings.

There is one rather important caveat, I must add. Forward earnings is an excellent leading indicator of actual earnings when the economy is expanding. Industry analysts don’t see recessions coming and tend to lower their estimates as the economic news worsens. So forward earnings is actually a lagging indicator during recessions.

Today's Morning Briefing: China Syndrome? (1) Not so hot and spicy. (2) Less power in electricity output. (3) Wage hikes are squeezing profits, but aren’t boosting consumption. (4) Demography driving the new normal in China. (5) Mr. Li’s favorite indicators. (6) No train wrecks or meltdowns in China. (7) Analysts expecting weakest S&P 500 earnings growth since the recession. (8) Forward earnings still bullish. (9) Energy and Materials expected to disappoint most. (More for subscribers.)

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