The Earnings Estimate Tug-O-War

Folks, the earnings tug-o-war is the single most important argument of the day – not the question of whether Greece defaults in 2011 or 2012.  And it is a tough one.  A few weeks back I hit upon the single most important thing investors needed to grasp (Yes stocks are cheap and yes the economy is getting worse).  Here is that concept playing out right before our eyes via Bloomberg:

Companies in the benchmark gauge for American equities trade at 10.2 times 2012 forecast earnings, compared with the average in economic contractions since 1957 of 13.7, according to data compiled by Bloomberg. At the same time, analysts have cut projections for profits next year by 2.6 percent to $110.78 a share, the biggest eight-week drop since 2009, the data show.

Bears say analysts have just started paring earnings estimates and that shares will prove expensive when gross domestic product shrinks. Bulls say stock prices have fallen so much that even should earnings fail to increase in 2012, equities are inexpensive.

Q3 earnings are right around the corner,  There were a startling amount of companies who, during Q2, pulled their guidance figures entirely.  We said at the time that this is never a good sign – we’re about to find out if that’s truly the case.


S&P 500 Valuations Below Recessions Since ‘57 as Estimates Drop (Bloomberg)

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