Barron's On Earnings Revisions.

Excerpted article from yesterday's Barron's Online on S&P 500 earnings revisions. Link & my comments follow at the end.

More Earnings Setbacks Ahead in '09
By JOHANNA BENNETT

As long as the real numbers continue to trail optimistic analyst estimates, it's hard to imagine a sustained stock rally.

DISMAL FOURTH-QUARTER FINANCIAL results, grim corporate guidance and a powerful recession have finally forced Wall Street analysts to get real about future earnings and ratchet down expectations for a comeback this year. But here's the bad news: Their recent downward revisions have probably not gone far enough.....Still, estimates have not dropped enough, and until they do, companies will keep missing expectations, making a sustained stock-market rally near impossible.
"Things will get a lot worse before they get better," says Dirk Van Dijk, research director for Zacks Investment Research.

Profits generated by big U.S. companies plunged 42% year over year in the fourth quarter of 2008, causing a 12% decline for the entire year. And that follows a 3.5% profit drop in 2007 from a year earlier.....Now, profits are expected to tumble 13.8% to $64.02 a share for 2009, the index's worse profit performance since 2003, according to a Thomson Reuters First Call tally of analyst estimates. Still, strategists -- the top-down thinker's on Wall Street -- think even that number remains 10% to 20% too high.....Zacks' Van Dijk says "it's a fantasy" to think that the S&P 500 will earn in the mid-$60s a share this year, as the sell-side analysts currently believe. "Around $50 is far more reasonable," he says.

Corporate profits have fallen year over year for six consecutive quarters.
The Street expects that streak to end in the fourth quarter of 2009 when the financial and consumer-discretionary sectors post huge gains fueled largely by easy comparisons to dismal performances last year. Not everyone is that optimistic. Sell-side analysts don't always consider economic trends when predicting earnings and tend to rely too much on corporate guidance.
But as more large companies forgo estimates amid an uncertain economic environment, analysts are left flying blind.Meanwhile, companies that do issue projections are increasingly warning that earnings could fall short of expectations.

Bright spots will be hard to find in 2009. If you exclude financial and consumer discretionary -- the two sectors expected to rebound most robustly in 2009 from last year's travails -- then profits will fall almost 18% this year, according to Ashwani Kaul, Thomson Reuters' director of research. Health care, utilities and consumer staples are the farthest removed from financial and economic turmoil. But estimates for 2009 have dimmed considerably in recent weeks.
Meanwhile, retailers, technology, home builders, energy, industrials, materials, automobile manufacturers and financials all face considerable headwinds.

Hope runs high that the $789 billion economic stimulus plan moving through Congress, a multitrillion-dollar bailout of financial institutions, and other government policies will stabilize the financial system and rejuvenate economic growth.....{M}any economists seem to be pushing back the timing of the next economic recovery as evidence mounts that this recession is deeper than previously imagined.....It's no wonder that strategists remain circumspect.....

...."Investors believe we have already taken stock prices down enough," to reflect plunging earnings," says Ed Yardeni, chief investment strategist for Yardeni Research. "Investors are saying that they figured things out long before the analysts did."....
...Of course, profound uncertainty continues to pervade financial markets and the economy following the historic upheavals of 2008. A lot hinges on whether the government's massive efforts to stimulate the economy, rescue the banking industry and unfreeze credit eventually work, and how long it will take. Will oil prices spike again or the U.S. dollar resume its decline, both of which will help S&P earnings? In view of these questions, consensus Wall Street estimates calling for an almost 14% drop in corporate profits this year may not be grisly enough.
And with some strategists looking for $55 or less a share in S&P 500 earnings for 2009, the resulting price-to-earnings multiple of 15 times that forecast doesn't look very cheap.

None of this bodes well for stock investors.

My comment: While I think earnings still need to come down it is unclear to me that this hasn't already been reflected in the 50+% decline in stock prices. Stocks will likely sniff out a recovery months before it is reflected in the real world. Stocks will likely start to rise when investors believe markets have troughed. That is when investors believe things aren't getting worse. Waiting completely for things to get better will likely mean chasing stock market performance at some point. A big clue for this trough will be when analysts stop taking these numbers down.

Link: http://online.barrons.com/article/SB123439576910774875.html {Subscription may be required.}

*Long ETFs related to the S*P 500.