Earnings Estimates Remain Intact

While continued concern in the Middle East, worries over debt crisis in Greece and greater Europe, and underwhelming economic numbers are giving investors cause for concern, it is important, from time to time, to take a step back from the news headlines.  Ultimately, the markets, both foreign and domestic, will follow the trend of corporate earnings.  If earnings are growing, markets tend to rise over time.  If earnings are declining, markets tends to fall over time.  Also, markets tend to discount future earnings by either moving up or down in anticipation of what may happen.  Therefore, we want to periodically review earnings to see if earnings estimates are being adjusted upward or downward by analysts who follow the companies.  Of course, analysts tend to often be late in making adjustments either up or down, so what we really want to follow is the trend of earnings estimates - are they trending higher, trending lower, or staying roughly the same.

Given the domestic markets have declined since the beginning of May, we would expect to see earnings estimates start to trend downward over the past month and moving forward. Let's take a look at earnings estimates for the S&P 500 as a whole and broken out by sector since the end of last quarter.  The aggregate top line number (first line) doesn't equal the total of the numbers below that number because companies can be in multiple sectors.
 

		1-Jun		1-May		1-Apr
S&P 500		97.88		97.21		96.99
S&P 500 Consumer Discretionary (Sector)		20.48		20.31		20.10
S&P 500 Consumer Staples (Sector)		21.53		21.43		21.30
S&P 500 Energy (Sector)		48.78		43.05		43.04
S&P 500 Financials (Sector)		16.65		17.73		18.21
S&P 500 Health Care (Sector)		32.47		32.92		32.77
S&P 500 Industrials (Sector)		20.87		20.83		20.52
S&P 500 Information Technology (Sector)		30.90		31.10		30.65
S&P 500 Materials (Sector)		17.89		17.33		16.92
S&P 500 Telecommunication Services (Sector)		7.81		7.69		7.75
S&P 500 Utilities (Sector)		12.78		12.86		12.85

 As you can see with the list above, with the exception of Financials most sectors have seen earnings estimates increase since last quarter or in some cases, like utilities and healthcare, revised slightly lower.  As of June 1st, only a few sectors have seen a decrease from May 1st estimates.  So while the markets have declined, earnings have not in aggregate.  The overall number for the S&P 500 (top line) has continued to move higher for 2011 and also 2012 (estimates not shown but currently stand at $111.82 for the index, up from $110.29 in April). 

If estimates trend lower in the coming weeks, the recent downturn in the markets is most likely adjusting to the probability of slower earnings growth this year and that adjustment would be considered normal.  However, if estimates continue to stay roughly the same and not trend lower (which we believe is likely), we could have a divergence from market expectations and actual earnings, which could send the markets into undervalued territory and create opportunities in certain sectors.  Earnings will be the key focus in the weeks ahead, especially in July when actual earnings for the second quarter are released.