Monday, January 12, 2009

Previewing 4th Quarter Earnings

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With earnings season about to kick off, now is a good time to gauge 4th quarter expectations as well as do some forecasting for 2009.

S&P Global has drastically cut back their expectations for the 4th quarter. As recently as September 10th, their forecast for 4th quarter operating earnings for the entire S&P 500 was 24.12. By year end, they had trimmed that number down to 16.19, and that number might still be overly optimistic. Furthermore, 16.19 would represent a 6.4% year-over-year gain compared to 4Q2007 earnings. Given the steep, double-digit drops in y/y earnings for the other 3 quarters of 2007 (-26%, -29%, -24%), forecasting growth for 4Q2008 seems like a stretch. However, the comparable was already low as 4Q2007's y/y was -31%.

The following chart shows year over year operating earnings growth for the S&P 500 for 2007 and 2008. The 4th quarter estimate is from SPGlobal.

To make matters worse for 4Q2008, the yield curve didn't become very stimulative until early 2008. It generally takes about a year for a stimulative yield curve to start generating earnings growth again. So while the 16.19 currently forecast by S&P Global is significantly lower than their September forecasts, we might still see operating earnings that fail to eclipse 15. It's no secret that retail was in a slump for the 4th quarter and the only recent bright spot, energy, did not fare well either.

For 2009, given the rate environment we experienced for all of 2008, I do expect to see a resumption of y/y earnings growth, though I don't expect earnings growth to be quite as robust as it's been with past recoveries. Currently, I expect 2009 operating earnings to come in around 70 to 72 for the entire year. With the S&P closing yesterday at 890, that would give us a forward P/E in the vicinity of 12.5.

Stocks are relatively cheap right now. It takes some guts to hold them at a time like this, but it's times like these where stock ownership is highly rewarded going forward.

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