Although it is tough to recognize in a market where the market p/e continually compresses, in my opinion there is an upward bias to corporate earnings estimates, whether it be to the fundamental nature of capitalism (profit maximation, etc.) or perhaps due to the seemingly optimistic outlook for their coverage, on the part of most analysts. Whatever the reason, corporate earnings estimates tend to drift higher over time, but the real money is made for investors when the market p/e expands, not just when corporate earnings estimates increase. (See our post on 5/23/12 on “A Decade or More of S&P 500 earnings” and the power of p/e compression.)
As we roll into each new quarter, there is typically an upward bump to the “forward 4-quarter” earnings estimate of the S&P 500. Let’s look at the recent history:
From December, 2010 to January, 2011: $92.22 to $96.42
From March, 2011 to April, 2011: $98.14 to $102.35
From June, 2011 to July 2011: $102.39 to $106.63
From September, 2011 to October, 2011: $104.44 to $107.58
From December, 2011 to January, 2012: $103.33 to $107.27
From March, 2012 to April, 2012: $105.67 to $109.27
From June, 2012 to July, 2012: $107.25 to ?
(Datasource: ThomsonReuters, This Week in Earnings)
If the pattern holds, when we get the update the weekend of July 7th – 8th, the new “foward 4-quarter” earnings estimate should be close to or above $110 per share, a new record forward estimate for S&P 500 earnings.
However as the reader can also quickly discern, there has been a flattening or stabilization of forward estimates in the $105 – $107 range over the last year. Ideally we’d like to see estimates drift higher through the quarter (from start to finish) but since the summer of last year, we’ve seen trimming of the estimates between the first and third months, which has resulted in a flattening of forward estimates.
For the S&P 500 corporate earnings estimate, year-over-year growth has slowed to “low to mid single digits” from the torrid 20% – 30% pace off the March ’09 market lows.
So what’s the point ? Coming into the start of q2 ’12 earnings from Alcoa on July 9th, expectations are very subdued, and the growth outlook is modest at best, so even if guidance is tepid and warnings are rampant, unless you have a portfolio of high p/e growth stocks, chances are a lot of downside is already built into the market.
I just dont think we are going to see a slashing of forward estimates down to the $100 level. There is still an upward bias to the trend (but we could be wrong, too.)
We have a “push-me, pull-you” market. Corporate earnings are going higher, while “the macro” and the headlines compress the market multiple.
At some point, one or the other has to give.
Long SPY, AA