Imagine This Scenario for Earnings Estimates

The above consensus earnings results produced thus far – 109 companies in the S&P 500 (29% of market cap) 10.3% above estimates* – are doing their thing and moving the fence sitters off the fence. No doubt some of the $3.5 trillion sitting in near zero interest rate money market funds is finding its way into equities. In the process, an overbought stock market gets even more overbought – moving right into the S&P 500 resistance zone of 950 – 1000.

As investors reacquaint themselves with their animal spirits, let’s do something constructive and take a moment to assess the investment significance of the aforementioned 10.3% above estimates fact.

Coming into this week, 2Q09 operating earnings estimates for the S&P 500 were around $14 – annualized to be $56, right in the zone of the consensus number for the full year. Well, if the actual results are coming in at 10% higher, then $14 becomes something closer to $15.50, which pushes the annualized number to approximately $62. Accordingly, investors might want to consider the following:

If companies can produce results that are 10% above estimates in the dismal and economically stressed second quarter of this year, what are they likely to do as the global economy continues to make progress toward stabilization and growth? Moreover, what are the likely corporate results for 2010 when the bulk of the US fiscal stimulus package (some $700 billion) kicks in?

Under such conditions, it is conceivable that the $75 S&P 500 operating earnings estimated by the folks over at Goldman (noted in my Tuesday blog posting) may actually be more than a touch on the low side!

Investment Strategy Implications

Stocks are extremely overbought and a move below 900 for the S&P 500 (versus a surge above 1000) is still the higher probability at this time. However, it is advisable that investors understand and respect the potential of a period of explosive earnings from now through the end of 2010.

While much can happen between now and then, the results for 2Q09 produced thus far are providing the evidence of such a scenario – one that is not on the radar screen of most investors, analysts, and investment strategists.

*Sam Stovall, S&P, July 22, 2009

Comments

[logicalthought:]

>>Coming into this week, 2Q09 operating earnings... pushes the annualized number to approximately $62... If companies can produce (those) results... in the dismal and economically stressed second quarter of this year...<<

The key phrase there is "operating earnings" which has lost its original usefulness as a way to value a business, and is now total BS unless you want to go back and remove a big chunk of the "profits" these companies were booking in the good years, much of which they are now "un-booking" as "one-time, non-repeatable events." I suspect that GAAP earnings will be hugely lower than your figures.

So, the question is: How easily fooled are investors?

Jul 24 07:53 AM

[Old Trader:]

Given that analysts seem to be consistently a day late, and several dollars short, and cut estimates too far the last time around, resulting in the setting of a low bar, is it unreasonable to assume they will err in the other direction on the next go-around? An excess of optimism sets up the real possibilty of earnings misses for the next reporting period, and very possibly the year.

Jul 24 08:39 AM

[John Galt:]

So basically, you believe the hype?

Jul 24 08:55 AM

[j-dub:]

Yes, imagine that if fantasy was reality, then reality would be allowed to stay fantasy.
What about all the BAD debt on the...
Never mind.
It sure must be nice.....................

Jul 24 09:17 AM

[J. D. Swampfox:]

Old Trader
Your argument is exactly the same as Morgan Stanley's in its bearish call for stocks.
See pragcap.com/analyzing-...


On Jul 24 08:39 AM Old Trader wrote:

> Given that analysts seem to be consistently a day late, and several
> dollars short, and cut estimates too far the last time around, resulting
> in the setting of a low bar, is it unreasonable to assume they will
> err in the other direction on the next go-around? An excess of optimism
> sets up the real possibilty of earnings misses for the next reporting
> period, and very possibly the year.

Jul 24 09:22 AM

[Schweizer:]

GAAP 2009 earnings are $29.98 = PE of 31. 3x too high for a bear market bottom.

Sorry to bust your bubble.

Jul 24 09:52 AM

[alajac:]

Reality doesn't matter to the herd. And if you stand in the herd's way you will become "roadkill". They're buyin' until they're sellin', and right now they're buyin': reason is irrelevant, as are those "fundamental" lies companies seem to like to twist around.

Jul 24 10:05 AM

[SivBum:]

The Mark to Market change to Mark to Murk created the gush of earnings in the Financial sectors. Very nice for spin doctors CFOs with their guidances.

Jul 24 11:03 AM

[tobi:]

I keep trading and watching along the sideline as the market can stay irrational A LOT longer. It's the same hype all again and people now about CMBS and alt A loans ahead but as long as the market stays up the mentality will be "I don't see a problem here, thus there is none". I'm not a bear by doctrine, but I have not yet seen a real reason why the economy should enter a period of strong growth.

Jul 24 05:22 PM

[KIT:]

UNP Union Pacific Rail spends a billion in fuel last year now, after parking 8000 engines they can have a suprise earning gain.....

If business picks up now they have to start buying fuel again cutting earnings.

Jul 24 10:28 PM