Tags: David Rosenberg | Gluskin Sheff | earnings | revision

Gluskin's Rosenberg: Changes to Wall Street Forecasts 'None Too Rosy'

By    |   Wednesday, 03 December 2014 02:38 PM

A measure of Wall Street’s earnings forecasts for S&P 500 companies has slipped for four straight months to levels not seen since 2012, when the Federal Reserve began its last stimulus program.

The earnings-per-share revision ratio, which tracks the proportion of upward to downward changes in analysts' estimates of corporate profits, slipped to a three-month moving average of 0.69 in November from 1.11 in July. When the ratio is greater than 1, positive revisions to forecasts are outnumbering negative ones.

“It has not been this low since the bout of turmoil we endured back in July 2012, which paved the way for QE3,” David Rosenberg, chief strategist at Gluskin Sheff & Associates Inc., said in a Dec. 2 report. “The picture is none too rosy.”

In July 2012, the U.S. unemployment rate was 8.3 percent, compared with 5.8 percent currently, and the European Central Bank cut its benchmark rate to a then-record low of 0.75 percent as Greece struggled with a debt crisis. The Federal Reserve began its third attempt to revive the U.S. economy with quantitative easing the following September after reports showed hiring was slowing and the labor force had shrunk.

Energy producers had the biggest drop in the revision ratio with a plunge to 0.20 in November, the lowest since April 2009, from 1.94 in June as oil prices collapsed. Consumer staples fell to 0.56 from 0.58, industrials slid to 0.71 from 0.93 and materials sank to 0.65 from 0.73.

In contrast, the healthcare industry’s ratio held steady at 1, while utilities gained to 1.15 in November from 1.03 a month earlier as analysts lifted their earnings estimates.

“It is against this background that the utilities sector has been blessed with a rich, and possibly richly deserved, 17.7 times price-to-earnings multiple,” Rosenberg said.

The effect of lower earnings on stock valuations remains to be seen, depending on how much investors are willing to pay for corporate profits.

David Kostin, head strategist at Goldman Sachs Group Inc., expects the S&P 500 to post single-digit gains in 2015 as earnings multiples shrink.

He estimates the forward price-to-earnings ratio for the S&P 500 will decline to 16 times in the second half of 2015 from about 16.1 times now. That would mean the stock index ends next year at 2,100, up about 1.5 percent from current levels, according to a report by Bloomberg News.

Kostin forecasts that earnings multiples will be pressured as the Federal Reserve raises interest rates next year, the newswire reported.

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A measure of Wall Street's earnings forecasts for S&P 500 companies has slipped for four straight months to levels not seen since 2012, when the Federal Reserve began its last stimulus program.
David Rosenberg, Gluskin Sheff, earnings, revision
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2014-38-03
Wednesday, 03 December 2014 02:38 PM
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