Earnings Revisions

We discussed earnings estimates regarding the S&P 500 in this post back in January:  How We Value The Stock Market .  Earnings revisions continue to rise.  Here is briefing.com's take on what has now been four quarters of consecutive upwards earnings revisions. {Excerpt with My highlights and comment at the end.}

Cloudy with a Chance of Earnings Revisions-Last Update: 16-Feb-10 07:47 ET

Earnings are the most important driver of stock prices. Lately, though, it seems as if they have been relegated to an afterthought by the market, which has been grappling with headlines discussing sovereign debt in the eurozone, China's efforts to curtail bank lending, and some spotty economic data that have provided reason to question the pace of economic recovery.  All the while, company after company has posted better-than-expected earnings results for the fourth quarter.

The latest data compiled by Thomson Reuters indicates 73% of the S&P 500 companies that have reported fourth quarter results have exceeded consensus earnings estimates......As was the case a few weeks ago, S&P 500 companies are not just beating estimates, they are blowing them away......The ease with which corporate America is surpassing earnings estimates has revealed two things: (1) analysts used very conservative assumptions in their earnings models and (2) all of the cost-cutting throughout 2009 has created some tremendous operating leverage......

......Currently, four sectors -- energy, utilities, industrials, and health care -- are on pace to register year-over-year declines in earnings for the fourth quarter. Five sectors -- financials, materials, consumer discretionary, technology, and telecom services -- are essentially carrying the earnings load for the S&P 500 in the fourth quarter.....

{Briefing.com's} qualitative assessment of earnings guidance for the first quarter and calendar year 2010 is that companies have been sounding a cautiously optimistic note.  There has been almost universal acknowledgment that the worst is over. At the same time, business activity, while better, is still tracking below levels seen before the credit crisis.....

...Bottom-up earnings for the S&P 500 in calendar 2010 are estimated to be $78.92. That would be 29% above the estimate for calendar 2009, yet 11% below the calendar 2006 actual of $88.18.....

...Of  the 10 economic sectors, only two -- energy and technology -- have higher estimated earnings growth rates for calendar 2010 today than they did....just ahead of the start of the fourth quarter reporting period. Every other sector has seen a cut in its projected growth rate, though it would be remiss not to mention that all 10 sectors are still projected to deliver earnings growth for calendar 2010.....

...It may seem at times then that earnings news is taking a backseat to headlines of another nature. The fact of the matter, though, is headlines about sovereign debt, China's efforts to curtail bank lending, and/or weaker-than-expected economic data all feed into the outlook for earnings.  Accordingly, the earnings growth outlook for calendar 2010 is being called into question, which is why trading volatility has increased.

On that note, {briefing.com does} not believe the stock market has been disappointed with the fourth quarter results or even the guidance for that matter. Instead {their} belief is that the market has been transfixed by some unnerving headlines that have given it reason to doubt the achievability of guidance that has been offered....Until that doubt is extinguished, the flames of volatility will continue to burn in the market.

{My comment:  There is always some uncertainty in the market's earnings.  But if you take a $78.92 eps number for the S&P 500 and apply historical multiples  you get a range of 1,026 {at 13 times earnings} - to 1,260 {at about 16 times earnings}.  Based on Tuesday's close stocks are either slightly overvalued or between 15 to 20% undervalued.  This fits within our thesis that stocks have the potential to trade between 1250 and 1300 by year end.  Where they end up will largely be a matter of how earnings look going forward at that time.}

*Long ETF related to the S&P 500 in client & personal accounts.  Long ETFs related to technology, energy and finanacial sectors in client and personal accounts.  Long ETFS related to health care, industrial  and certain materials sectors in certain client accounts.

Link:  Earnings Revisions