(originally published on January 12, 2008)
We are now firmly into the earnings season. The next three weeks will see the bulk of corporate America report their 2007 year-end results. From where we sit, it sure does not look good. Earnings estimates have taken a remarkable hit in the past few weeks. At the start of 4Q, analysts estimated S&P 500 stocks to report an earnings growth rate of 11.5%. That has of course now changed. Thomson Financial estimates that blended S&P 500 earnings, combining actual numbers for companies that have reported and consensus estimates for companies yet to report, is likely to have declined 11.3% in 4Q, largely driven by mammoth downward revisions in Financials. This is the wildest swing in estimates within a quarter, ever since Reuters began compiling them in 1999.
However, if one were to exclude the Financials from this tally, the earnings picture looks a lot better. On this basis, cumulative earnings ex-Financials could be expected to increase 12%, in line with forecasts issued in early October. Utilities, Energy, Technology and Telecom are all expected to have notched up earnings growth of 15% or more in 4Q. All sectors except Financials are expected to notch up positive earnings growth in each quarter of 2008. Nonetheless the unrelenting weakness in Financials has turned overall sentiment bearish heading into the thick of the earnings season. On a slightly contrarian note, this excess negativity could actually turn out to be bullish for the broader markets if the other sectors report inline or better than expectations. It will certainly be interesting to see how the earnings season shapes up.
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