Optimistic securities analysts are starting to lose their nerves. According to the Reuters Estimates survey, Wall St. thinkers now believe that earnings for the S&P 500 will drop 5.5% in the first quarter of 2008. One week ago, that number was a 2.7% drop. The outlook among the group when it comes to Q2 is for earnings to fall .9% from the same period a year ago. Just last week, that estimate was for a .2% gain.
It is not hard to imagine these kinds of revisions for earnings estimates at smaller companies, but guessing the results for S&P 500 companies should be a bit easier. Analysts have known about the economic downturn for a bit more than a weak, so the big drop in estimates is surprising.
The news gets to the heart of forecasting earnings. It is why there are so many "earnings surprises" and "earnings disappointments". Much of what is called research is a set of educated guess. Better than dart board math but not really the kind of firm and assured opinion which investors believe comes from research houses.
Next week, the earnings estimates for the S&P 500 will get worse again. The average investor will not be surprised. He does not have enough money to buy gas and pay for his mortgage.
Douglas A. McIntyre
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