Blog - Investing Notes

October 13, 2008 - Quarterly Aggregate Earnings Estimate Evolutions

Standard and Poor’s quarterly S&P 500 earnings estimates are key inputs to our Real Earnings Yield Model and our Reversion-to-Value Model of stock market behavior. Several readers have inquired or commented about the accuracy of earnings estimates. How accurate have they been? During 2006-2008, we tracked the evolving bottoms-up S&P 500 year-over-year quarterly operating earnings growth estimates. During the early part of this period, we recorded the average of the publicly available Standard and Poor's and Reuters earnings estimates (generally similar), as released. During the latter part, we recorded only the Standard and Poor's estimates. Using evolving earnings estimate data for these 12 quarters, we find that:

The following three charts trace approximately the evolutions of bottoms-up S&P 500 year-over-year quarterly operating earnings growth estimates for 2006, 2007 and 2008, respectively. The horizontal axes measure weeks from the end of the estimated quarter, so negative numbers are weeks before the end of the quarter. Negative values on the vertical axes indicate that estimated quarterly earnings are lower than those of the year-ago quarter. Note that:

• During 2006-2008, estimators started almost all quarterly earnings growth estimate evolutions at about +10% to +15%.
• Adjustments after the ends of the quarter are often large and tend to be concentrated three to five weeks after quarter ends (earnings season). In other words, actual earnings often substantially surprise the estimators.
• For the fourth quarter of 2007 and the first two quarters of 2008, actual earnings are dramatically lower than early estimates. Investors may be expecting a similar evolution for current and future quarters.
• The estimated year-over-year growth for the fourth quarter of 2008 is very high because the estimated earnings for that quarter fall much more slowly than do the estimated earnings for the (compared-to) fourth quarter of 2007.
  

In summary, recent S&P 500 aggregate bottoms-up earnings growth estimates have often been substantially inaccurate.

Although we did not record the data, we recall that evolutions of S&P 500 bottoms-up operating earnings growth estimates for much of 2003-2005 looked something like 06Q3. It may be that early overestimates (underestimates) are typical of bear (bull) stock markets. In other words, the stock market may predict actual earnings better than do earnings estimates.

For related research, see Blog Synthesis: Valuation Based on Fundamentals and Earnings Trends. See especially the similar, but less robust, blog entry of 7/11/08.