Slower Earnings Growth

I think I’ve been too optimistic regarding earnings growth for this year. I thought there was a chance that profit growth could come in lower-than-expected, but now we’re seeing the proof.
Jacqueline Doherty notes in Barron’s that on January 1, first-quarter earnings growth for the S&P 500 was estimated to be 8.7%. Today, it’s down to 3.8%. Since analysts tend to low-ball their forecasts, the results will probably be a bit better, perhaps around 7% or 8%.
After that, however, things get hazy. For the second quarter, analysts see earnings growing by 4%, then 6.8% for the third quarter and 12.5% for the fourth quarter. I expect that the forecasts for third and fourth quarters will soon be pared back.
The reason for the slower earnings growth can be blamed largely on just two sectors—the homebuilders and the autos:

James Paulsen, chief investment strategist at Wells Capital Management, notes that 91% of real gross domestic product is growing by 4.3%. Only 9% of the economic is contracting by 10%–the part that is attracting all the attention.

The good news is that even with lower earnings growth, the S&P 500 is still going for just 15.2 times 2007’s earnings.

Posted by on March 31st, 2007 at 11:49 pm

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