Earnings Keep Being Revised Higher

Stocks follow earnings. This is perhaps fundamental rule #1 of investing. One of the reason that stock prices have continued to move higher over the summer is that earnings estimates for many companies continue to march ever higher. BeSpoke Investments quantifies below the significance of these revisions and shows their relationship to stock movement these past six months: {highlights mine}

While the flow of earnings reports has been slow in recent weeks, analysts have become increasingly bullish on the companies they cover. Our daily tracking of analyst revisions for stocks in the S&P 1500 shows that over the last four weeks, 578 companies in the S&P 1500 have seen their earnings estimates increase, while 389 have seen their numbers cut. This works out to a net of 189, or 12.6% of the index. As shown in the chart {above}, this is the highest level since at least the start of 2008 (red line), and is a major improvement off of where we were six months ago, when the net earnings revision ratio was closer to "-50%".

While analysts are typically thought of as being behind the curve, so far this year they have done a good job of leading the market. When equities bottomed in March (blue line), analyst revisions were already well off their lows of the year.
With the equity markets currently in the earnings off season, investors who want to get a weekly read on analyst expectations can track the pace of analyst earnings estimate revisions. Each week in {Bespoke's} Earnings Estimate Revisions Report, {they}summarize these trends for sectors and major groups over the last four weeks. If the pace of revisions is increasing heading into earnings season, it implies that analysts are turning positive on the prospects for the companies they cover, and vice versa when the pace is slowing.

Link: http://bespokeinvest.typepad.com/bespoke/2009/09/earnings-revisions-at-a-two-year-high.html

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