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What to expect this earnings season



October 07, 2010 – Comments (6)

Useful thoughts from the Pragmatic Capitalist and David Rosenberg


7 October 2010 by TPC


In early January I said the back half of the year was likely to be characterized by earnings estimates that are too high.  And for the first time in over a year analysts are cutting their estimates right on cue:

    “For the first time in more than a year analysts are cutting their forecasts for Standard & Poor’s 500 Index earnings, jeopardizing gains from the biggest September rally since World War II.

    Estimates for S&P 500 companies’ combined 2011 profit fell as low as $95.17 last month from an August high of $96.16 and posted the first quarterly reduction since the three months ended June 2009, according to more than 8,500 analyst forecasts tracked by Bloomberg. The revision came as the benchmark gauge for U.S. equities rose 8.8 percent last month, the largest September advance since 1939.”

David Rosenberg of Gluskin Sheff says these estimates are still far too high:

    “Indeed, this is the bottom-up S&P 500 operating EPS estimate that is currently driving equity valuations — if you don’t believe it, then go to page 26 of Barron’s (Facing Up to the Real Third Quarter). That would be a 14% gain on top of this year’s anticipated 36% bounce. But here’s the problem, the economy is no longer accelerating, it is decelerating. And to show how a sub-2% real GDP growth can wreak havoc with corporate earnings when margins are close to peaks rather than troughs, the national accounts data show vividly that on a sequential seasonally-adjusted basis, pre-tax corporate earnings (without IVA and CCA) barely rose at all in Q2 (+0.9% QoQ). So continued double-digit YoY growth (the consensus is +24% for Q3) is masking the slowdown evident on a quarter-by-quarter basis.

    Here’s the rub: to get that $95 operating EPS for 2011, we either need to see at least 7% nominal GDP growth, which last happened in 1989 when inflation was 5%, not close to zero, or margins manage to reach new all-time highs. We won’t entirely rule this out, but will give it 1-in-25 odds of occurring. All we can say is that the base case is for low single-digit nominal growth and some margin compression so frankly we could be looking at something closer to a $75 earnings stream next year. Moreover, when one slaps on a 10x multiple on that — consistent with the economic uncertainty commensurate with a post-bubble deleveraging cycle — then getting to 750 at some point in the S&P 500 is not at all out of the question.”

Rosenberg is likely correct barring some miraculous economic rebound in 2011.  Unfortunately, the many macro headwinds are likely to persist well into 2010.  That means the meager recovery in revenues is likely to continue.  Thus far, revenues have remained the crux of the economic problem.  When sales fell companies were forced to fire workers.  Without a strong rebound in revenues there has been no need for hiring.  With very low aggregate demand due primarily to the weak consumer, revenues just haven’t rebounded despite a nice rebound in bottom line growth.  Currently, revenues per share (S&P 500) are just 6.5% off their trough and 15.5% from their all-time highs:

See the link above for charts and more commentary

6 Comments – Post Your Own

#1) On October 07, 2010 at 8:31 PM, outoffocus (23.08) wrote:


Welcome back dude.  You were gone so long I almost put up a blog asking where you were.  I was wondering your thoughts on the recent massive runup in PMs.  Especially since it seems every blogger with a pulse is suddenly an expert on gold.  Check out my comment on Skepticalox's blog regarding gold bubbles. 

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#2) On October 07, 2010 at 10:01 PM, Tastylunch (28.74) wrote:

hold onto you butts!

The first real chance of big earnings miss is nigh if analysts don't get super aggressive in cutting. We'll know very soon if  the market will "W"


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#3) On October 08, 2010 at 1:46 AM, binve (< 20) wrote:

outoffocus ,

Hey sister!

>> You were gone so long I almost put up a blog asking where you were.

:) Just busy with a bunch of other stuff.

>> I was wondering your thoughts on the recent massive runup in PMs.  Especially since it seems every blogger with a pulse is suddenly an expert on gold.

I know exactly what you mean. Like I talked about here (a month ago before the breakout) I hate talking about Gold during a breakout. I do my posting and blogging (and buying) when it is unloved and hated.

I was predicting this breakout (or at least my charts and counts we giving me pretty good odds on it) so this is when I sit back and enjoy the ride. It is much more useful (IMO) to talk about Gold when it is in the middle of a huge pullback and everybody saying 'The bubble burst!'.

That is when it pays to reexamine the fundamentals, and see if a good buying opportunity awaits. And everytime the past several years they answer has been 'yes'.

So that is why I haven't been posting on Gold. If people want to jump on the Gold bull while it is actively bucking, then power to them. But that's when people get thrown off. Me, I like buying when the cow is being Fed or sleeping, much safer to get on :)

>>Check out my comment on Skepticalox's blog regarding gold bubbles. 

Will do!

Tastylunch ,

Hey Tasty!

lol! yep, hold on  to your butts is right :) I totally agree. This runup is highly expecting some big beats. We will see, but I think that odds of some disappointments is pretty serious...

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#4) On October 08, 2010 at 12:32 PM, Rehydrogenated (34.06) wrote:

So this guy is predicting next year we will have lower revenue, combined with lower margins, and no inflation?

I would say its far more likely that we see flat revenue, bouncing margins (if the future looks good margins will actually decrease, while if the future looks flat/bleak margins will increase), and inflation is a wild card (although with all the QE its easier to imagine 10% inflation for me than 0.)

95 might be a high estimate, but what makes him think 75 is the correct number? 

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#5) On October 09, 2010 at 11:27 PM, scruffy4life (82.87) wrote:

The day of reckoning is nigh... I reckon.

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#6) On October 14, 2010 at 3:56 PM, neileaque (< 20) wrote:

Really,i empress with your comment,always i read your comment.

where do you live just tell me,i want to meet you......


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