Analyst Earnings Revisions Still Extremely Negative

In our prior post, we highlighted how given the unusual proportion of companies lowering guidance, investors are not expecting much from companies heading into this earnings season. Looking at trends in earnings estimate revisions among analysts shows a similar picture. Each week in our Bespoke Earnings Estimate Revisions report, we summarize trends in analyst expectations within sectors and groups. For each sector and group, we calculate the net number of companies that have seen positive earnings revisions over the last month (positive revisions minus negative revisions).

As shown below for the S&P 1500, although they are off their lows from November, net revisions (red line) remain near their lowest levels since the start of 2008, and they're lower than they were heading into any of the last four earnings seasons. Over the last four weeks, analysts have collectively lowered EPS forecasts for 982 companies, and only raised forecasts for 140.

The only question now is, have analysts finally gotten ahead of the downward spiral in corporate earnings and adequately anticipated the declines that occurred during the fourth quarter? Or was the fourth quarter so bad that even the current pace of negative revisions is not enough?

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Comments

[CautiousInv...:]

Very interesting information.

As to your question, I don't think anyone can answer with any measure of certainty because of the great uncertainty built into the economy.

Two or three weeks ago, consensus thinking was that the economy was going to turn around early in the second half. Now it looks like there is growing appreciation for the likely depth and protraction of the current recession and that the stimulus plan will not perform miracles. We are also seeing hints that party politics will both compromise and delay implementation the plan.

Resultantly, mainstream economists are revising their forecasts and moving closer to Roubini, Schilling and Felstein. The latter see a turnaround in the economy in early 2010 which also suggest that is when corporate earnings would improve. Earnings estimates for the SP500 have not caught up with this thinking and, in my opinion, have further to fall.

Jan 14 07:44 AM

[Prudent Man...:]

In my fifty years, I have never heard or met anyone in a big corporation who can tell me specifically what they will earn in the next quarter yet alone years. It is an art. I have yet to meet a serious Prophet.

Think about this: Can a company (e.g. GE under Welsh) "manage" their earning by juggling depreciation and/or amortization as an easy example? Of course they can and they do until the Fat Lady Sings!

This market is one of the greatest thing that ever happened since 1982 for investors. Unfortunately, the Fed and Congress will screw it up with their money grab. But, for companies, they will be throwing in everything unfavorable, like Clinton ignoring the Taliban, and clean up their balance sheets as well as the FASB is finally getting around to cleaning up accounting. Hopefully an investor will actually be able to get an approximate understanding of what a company is doing and worth. One certainly has not been able to do that in the last decade.

Still, the best companies are privately owned and, even when they have excellent venture capital, want to stay that way so the don't have to be concerned about aggravating, ignorant government bureaucrats, hitting quarterly earnings, lazy security analysts, etc. I never thought of bringing my company public, to the chagrin of some of my partners who are now living a comfortable life in retirement.

Jan 14 09:07 AM

[johnbee:]

The market was way overvalued anyway and a good cleanout was needed. Market forces should leave those companies left in the game to do very well as their competitors either fail or are taken over for peanuts. To find those companies look for large historically well managed companies with low debt and cash. Any suggestions welcome.

Jan 14 02:02 PM