Blog - Investing Notes

July 11, 2008 - Room for More Gloom in Earnings?

How stable are the quarterly aggregate operating earnings growth forecasts for the S&P 500? What has the trend in these forecasts been lately? Using the earnings forecasts published every one to two weeks by Standard and Poor’s (and by Reuters until recently discontinued) for the eight quarters of 2007 and 2008 over the period 5/15/06 through 7/9/08, we find that:

The following chart shows the evolution of the 2007 quarterly operating earnings growth forecasts for the S&P 500 generated from the average of the Standard and Poor's and Reuters earnings forecasts. Growth forecasts for all four quarters commenced in May 2006 in the range 10%-13%. The earnings growth forecasts for the first and second quarters evolve within a fairly narrow range of about 6%-11%. The earnings growth forecasts for the third and fourth quarters range more widely and fall dramatically after October 2007.

How about 2008 so far?

The next chart shows the evolution of the 2008 quarterly operating earnings growth forecasts for the S&P 500 generated from the average of the Standard and Poor's and Reuters earnings forecasts before May 2008 and from the Standard and Poor's earnings forecasts alone thereafter. Growth forecasts for all four quarters commenced in May 2007 just above 10%. The earnings growth forecasts for the first and second quarters decline noticeably starting in October 2007 and then accelerate downward as earnings releases approach. The forecasts for the third and fourth quarters start moving up in October 2007, not because of increases in forecasted earnings but because forecasted earnings for 2008 fall more slowly than forecasted earnings for the same quarters in 2007.

Investors, extrapolating recent experience, likely fear that earnings growth forecasts for the second, third and fourth quarters of 2008 will dive as the respective earnings seasons play out.

See the Real Earnings Yield Model and the Reversion-to-Value Model for examples of the use of earnings forecasts in market valuation models.

In summary, S&P 500 operating earnings growth forecasts exhibit considerable (mostly downward) variability since October 2007.

For related research, see Blog Synthesis: Valuation Based on Fundamentals and Earnings Trends.