Equity Analysts: Too Optimistic About 2009?

by: Mark McQueen

Guess what research analysts think is going to happen to earnings for the S&P 500 in 2009? Shrink or grow versus 2008?

The headline was probably too much of a hint, but on Wednesday, it stunned me to hear that equity research analysts — en masse — predict earnings growth of 21.3% for the S&P 500 in 2009.

It’s already February 2009, the global economy is actually getting worse in most corners (although the Baltic Dry Index is jumping) of the planet, layoffs are rampant and the various government stimulus programs won’t really get rolling until 2010, yet earnings will grow this year? There’s an easy wager to take the other side of.

This figure is the byproduct of a “bottoms-up” analysis of each member of the S&P 500 stock index. If you take all of the 500 firms, and collect the consensus operating earnings data for each component, you arrive at a global prediction for the earnings of the entire benchmark (S&P defines it as “S&P 500 Operating Earnings by Economic Sector: Bottom-Up Estimates as of 02/17/2009”).

According to this analysis (currently available for your own review here), the 2009 price/earnings multiple of the S&P 500 is 11.85x, far cheaper than the 2008 estimate of 14.4x. Interestingly, 2007’s P/E multiple was 17.8x, a modest increase from 2006’s 16.2x.

On an individual sector basis, research analysts believe the earnings for the Consumer Discretionary, Consumer Staples, Financials, Health Care and Utilities sectors will all improve this year. The largest swing is in the financials.

Ex-Financials, research analysts across the board see 2009 earnings dropping by 14%. That is starting to make some sense, but still seems light to me. And, when you throw in the banking component, yowza! A negative 2008 for banks is forecast to be positive in 2009; in fact, for 2009, S&P component banks are forecast to throw off about half the aggregate profit they made in 2007. Capital market volumes are down, loan losses and reserves are going up, more asset writedowns are still to come - none of which hampered bank earnings in 2007.

This specific sectoral forecast swing drives overall earnings growth for the S&P 500, which suggests that the market is cheap-ish on a forward P/E basis. Often that’s a sign of a buying opportunity, and that the worst is over.

How many of you think that makes any sense at all? Hands up.

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