JUST HOW MUCH “BETTER THAN EXPECTED” ARE EARNINGS?
Taking a big picture view of the current earnings environment shows just how much “better than expected” the current earnings have been. Despite having predicted the current rally, I am highly skeptical of the quality of the rally. The following graph shows the timeline of analyst’s Q2 estimate changes. As you can see, the estimates have been slashed by nearly 50%. Could the analysts have gotten it more wrong? And why is anyone now surprised that they were so far off again? All of this has to make you wonder just how important “better than expected” really is. Reader Robert in Chicago elaborates:
These numbers are for S&P 500 “operating earnings,” which exclude the allegedly one-time items; GAAP earnings, which can’t be gamed as much, are literally half as much this quarter, the largest divergence ever apart from 4Q08 — 44% below 2Q08 and 68% below 2Q07.
According to the S&P website, the present P/E ratio of S&P 500 based on reported earnings is 144.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,1,11,0,0,0,0,0.html
Which means that it will take 144 years for long-term investors to recoup their investments in S&P 500 at currently reported earnings.
Perhaps the earnings are better than expected. But waiting 144 years to return the money on your investment sounds like an awfully long time to wait. It doesn’t make much difference to me if I have to wait 200 years or only 144 years. Because either way I probably wouldn’t live long enough to see my money back on such an investment.
Actually with the unexpected gains taken in Q2 2009, trailing year earings are about $7.75. That is a multiple of only 129 now. But the key is forward earnings, can they rise much above $12 over the next several years?
My gut sees as reported earnings in the $12-$14 range for a while. That is a forward multiple of 18 to 20. Appropriate with reasonably strong foward growth over the next several years in a low inflation environment, but very high if growth does not materialize or if inflation picks up strongly. Very slow growth, low inflation maybe a 14 multiple (S&P 500 at 800). Slow growth, high inflation maybe a 10 multiple (S&P 500 at 550).
If earnings growth much more strongly, then maybe the market is fairly valued here and can levitate significantly higher.
Perhaps Q2 2009 earnings are better than many analysts expected. But Q2 2009 earnings are actually worse than Q1 2009 earnings were.
http://www.zerohedge.com/article/cnbc-now-openly-misrepresenting-reality
There were no unexpected gains in Q2. It’s all a fabrication of the media and naive investors who don’t check the facts.
Well, the earnings reports are misleading.
Earnings actually are coming in very close to the bottom up estimates. Not better or worse overall. With 79% of the S&P market value reported, operating earnings are $11.11 per Howard Silverblatt (I asked him myself). If we extrapolate that to the remaining 21% then earnings will come in at about $14.06. Just below the bottom-up estimates. The top-down estimates were off due to changes in the index composition. (In my opinion, that is poor reporting on the part of S&P analysts.)
The data is however not comparable to last year’s Q2 earnings of $17.05 because the composition of the index has changed. Comparing the earnings of the companies currently in the index, earnings are down -36.8% for the companies which have reported so far. That compares to -39% in Q109 versus Q108.
GAAP earnings are coming in much better than expected due to one time gains (e.g. Citibank) and a lack of write-offs (which could be a good omen or a bad omen for the future. Are potential write-off building up until they absolutely must be taken, or were companies aggressive in Q408 and Q109?)
MARKET QUOTES
THIS WEEKS MOST POPULAR STORIES
MARKET NEWS
© 2009 pragcap.com · Login.
Home · Advertise · Contact us · Disclaimer ·