Tuesday, January 8, 2013

S&P 500 Earnings Squiggles

I track the industry analysts’ annual consensus earnings estimates of the S&P 500 for the current year and the coming year on a weekly basis. I call them “Earnings Squiggles” because that’s what they look like. As of last week, industry analysts estimated that the S&P 500 will earn $112.98 this year and $125.91 in 2014.

The estimates for 2012 and 2013 mostly fell all last year, yet the S&P 500 rose 13.4%. I have the Squiggles data back to 1979 on a monthly basis. More often than not, they tend to trend down; yet more often than not, the market has trended higher. That’s because the market discounts 12-month forward consensus expected earnings. A good proxy for this concept is forward earnings, i.e., the time-weighted average of consensus estimates for the current and coming years. It tends to be a good 12-month leading indicator for actual profits, with one important exception: Analysts don’t see recessions coming until we all do too.

The bottom line is that the bottom line for S&P 500 companies on a 12-month (and on a 52-week) forward basis rose to a record high at the beginning of this year even though analysts have been lowering their estimates for 2012 and 2013.

Today's Morning Briefing: Snakes, Squids, & Squiggles. (1) Seeing patterns. (2) Let the earnings season begin. (3) Cobra formation in estimated and actual earnings. (4) Earnings surprises for the sectors tend to be surprising. (5) The guidance myth. (6) Squid formation: Biggest downward revisions for Materials, IT, Financials, and Industrials. (7) Market often goes up even when Earnings Squiggles go down. (8) Another record high for forward earnings. (9) Record highs for MidCap and SmallCap stocks too. (10) A good year for auto dealers and retailers. (More for subscribers.)

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