Analyst Earnings Estimates Won't Save the Stock Market

by: The Fundamental Analyst

It is the habit of stock market bulls to find any positive data point they can to justify their position, even in the face of overwhelming evidence to the contrary. One of those positive data points is earnings; no doubt about it, US corporate earnings have been extremely robust since bottoming in 2008, as shown below. Note that 2Q11 earnings are not yet complete, but 80% of companies have reported already.

[Click all to enlarge]

The latest quarter shows that quarterly operating earnings have now overtaken their previous peak in 2007; however, current strong earnings are no guarantee of future earnings. As noted on this blog numerous times during 2008, analysts like economists are notoriously slow to recognize turning points in the economy and thus to revise earnings forecasts. A look at analysts' estimates of 2008 operating earnings in late 2007 underscores this phenomenon.

Even in November 2007, when the proverbial stuff had begun to hit the fan, consensus operating earnings for the S&P500 stood at $105; just over a year later, when the actual numbers were reported, S&P500 operating earnings were a lowly $49.50. So beware of the current line given by bullish analysts that goes something like this: With FY12 earnings forecasts to be in excess of $110 and a S&P500 of 1119, the market multiple is only 10 times and therefore a screaming buy!

If the US is entering recession -- and I think it is -- then those forecasts above simply won’t happen, so don’t hang your hat on analysts' forward earnings estimates. They are and always have been lagging indicators.