Keep your focus on the trends in estimates, not on the levels! An estimate in motion tends to stay in motion. Estimates are dropping rapidly, and nearly across the board. This is particularly true for 2009 estimates where a staggering 1 in 4 S&P 500 firms saw their mean estimate fall by more than 15%, and more than 1 in 10 saw a decline of more than 25% over the last month. This means that the currently measured expectations for the fourth quarter and for 2009 are far too high. The growth rate expected for 2009 has been sustained by the expectations for 2008 dropping at a similar rate. Versus the stable base of 2007 earnings the expected growth rate has declined from 12.4% to 9.8% in just the past week. It is my personal expectation that that number will fall below 0.0% by Christmas. Similarly, due to a very weak 4Q in 2007, year over year growth in total net income is now expected to be 15.2%, but this is down from 17.7% just last week. The fact that the revisions ratios for 2008 are deeply in negative territory in the face of more positive than negative surprises is a very negative development.

Scorecard and Median EPS Growth Rates
• 392 or 78.4% of S&P Companies have reported through 11/4 close
• Surprise ratio at 1.86, median surprise at 1.95%, both somewhat below normal
• Median EPS growth at 6.90%, surprisingly good given the economic environment
• Energy (52.0%) and Tech (12.9%) and Industrials (12.8%) leading
• Financials (-29.9%) doing the worst
• Expected Growth of 7.7% for those left to report
• Health Care leading on surprise front, Financials disappointing

The Zacks Revisions Ratio: 2008
• Revisions ratio for full S&P 500 up to 0.31, from 0.27 on Thursday
• Health Care by far the strongest at 1.07 in response to earnings surprises
• Health Care accounts for 26% of all estimate increases, revisions ratio 0.21 excluding Health Care
• Cuts outnumber increases by more than 3:1 in 7 of 10 sectors
• Ratio of firms with rising to falling mean estimates at 0.27, up from 0.24
• Total number of revisions (4 week total) up to 3,857 from 3,474 on Thursday
• Increases up to 913 from 763, cuts up to 2,944 from 2,711
The Zacks Revisions Ratio: 2009

• Full S&P 500 2009 revisions ratio up to 0.13 from 0.12 on Thursday
• More than 10 cuts per increase for 7 sectors
• Health Care the “best” at a 0.46 reading
• Ratio of rising to falling mean estimates down to 0.11 from 0.13
• Total number of revisions up to 3,707 from 3437 on Thursday
• Increases up to 412 from 378, cuts up to 3,295 from 3,059
• Size of cuts horrific: 25% of all S&P firms 09 estimates down more than 15% over last 4 weeks, 11% down more than 25%
• Only thing holding up 2009 expected growth is the decline of 2008 base

Market Cap versus Total Earnings

• S&P 500 P/E for 2008 12.8 and 10.8x for 2009
• Forward Earnings Yield of 8.84% wildly attractive relative to 10 year T-Note of 3.69%
• Real P/E’s are higher (and earnings yields lower) since the “E” is still way to high
• Financials expected to get 6.2% of total S&P earnings in 2008, down from 21.6% in 2007, rebound to 15.5% expected for 2009, currently represent 14.6% of total market cap
• Energy’s share expected to grow to 22.2% of total in 2008 from 15.6% in 2007, expected to recede to 18.2% in 2009. Sector represents just 12.8% of the index market cap
• All sectors but Financials and Consumer Discretionary expected to lose earnings share in 2009, although both will be below 2007 shares
• Energy P/E by far the lowest for both 2008 and 2009, at 7.3x and 7.6x, respectively

Would anyone expect an auto salesman to point out the disadvantages of an auto they are attempting to sell?

Mish has been correct about future earnings declines for a very long time. If corporations and consumers are cutting back on purchases how can honest earnings estimates do anything but decline?

Some in the blogsphere have called that a “paranoid” school of thought.

Actually it’s a deeply rational analysis, based on quite a few data points.

Matt Dubuque

http://epiphanyinvesting.com/2008/11/02/barrons-notes-disparity-between-individual-company-spx-estimates/

http://www.cnbc.com/id/15840232?video=920170651&play=1