Earnings Projections Are Still Coming Down

Here’s a look at the S&P 500 along with its earnings. The black line is the S&P 500 and it follows the left scale. The yellow line is the earnings and it follows the right scale. The two lines are scaled at a ratio of 16-to-1. This means that whenever the two lines cross, the market’s P/E Ratio is exactly 16.

The earnings line into the future represents the consensus from analysts. The problem is that earnings projections have been coming down. The analyst community now expects the S&P 500 to earn $113 next year. That’s still a good number but it will require earnings growth to ramp from the small earnings decline we saw with Q3.

When I saw Barry Ritholtz’s investment conference last month, Barry posted a graph showing how poor analysts have been in getting earnings growth right. It seems to me that as long as the earnings growth trend continues, then analysts are pretty accurate in getting that right. Of course, that’s the least important information. Where they’re wrong is in targeting when earnings suddenly drop. That’s the most important information.

Posted by on November 8th, 2012 at 11:24 am

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