The latest weekly from John Mauldin - Is That Recovery We See? - has a bunch of interesting charts; especially ones on analyst estimates for S&P earnings in 2008 & 2009.
… let’s look at just how bad analysts blew it estimating 2008 earnings. In the table below, as recently as October of October 15, they were estimating AS REPORTED earnings to be $54. down from $92 when I first saw the 2008 estimates. There were only two months to go in 2008. So, what are the actual 2008 earnings? Down to $14.88!
From $92 to $15. How much worse can it get as an analyst? What’s the point of the estimates?
The P/E ratio for the end of the second quarter is 1944 (not a typo). The losses of the 4th quarter almost wipe out all earnings for the 12 months ending June 30. But by the end of the 3rd quarter, the P/E ratio has dropped to a negative -467. That has never happened. We have never seen negative earnings over a 12 month period since WW2.
P/E ratios? Fuggedaboutit. Even at the index level, the ratio has stopped making sense given the implosion in bank earnings, and double-digit declines in all sectors.
There are a lot of pixels being wasted on arguing whether this is a bear market rally or the next big bull. What really matters is where things are going to settle down once we are past the negative P/E.
… If the high correlation between stock prices and data surprises holds, the recent rally in stocks might be tested. Even if the economy has bottomed, it’s very likely that the eventual recovery will prove to be uneven, causing the flow of positive surprises to be uneven. During these periods, the risks to stocks will be greatest when the market is overbought and investors have priced in high expectations of positive data surprises continuing.”
It’s one thing to aruge that we are past the worst. It’s another thing to argue that going forward, things will be back to ‘normal’. The new normal is likely to be much worse that expected.
As for India, analysts are now acknowledging the reality of a 10-15% drop in earnings - and hence Nifty EPS. But a few positive surprises in the April reporting season, and we’ll back to calls for Nifty at 5000, Sensex at 15000, and what not.
Bottom-line: Buyer beware.