Talk about optimism. Consensus analysts’ earnings estimates for S&P 500 companies for 2010 are now at $77.61 per share—that’s a 30.5 percent jump over 2009 estimated earnings, ThomsonReuters said today in its weekly “This Week in Earnings” report.
That’s a rather large jump. But then 2009 won’t go down in history as the most profitable year for corporations. This new, bullish earnings estimate called to mind something I read this week in “Breakfast with Dave,” the opinionated and fact-filled research report issued daily by David Rosenberg, chief economist and strategist, late of Merrill Lynch, and now with Gluskin Sheff in Canada.
In a report on Tuesday, Rosenberg says this recovery, if that’s what it truly is, is very weak historically speaking and does not justify the “wildly bullish” market sentiment. (He notes, bearishly, that “portfolio manager cash ratios are the lowest since the market peak of October 2007.”)
Rosenberg made this interesting observation: “We ran some simulations back to 1955 and found that historically, what is normal is that every basis point of nominal GDP growth typically generates 2.5 percentage points of corporate earnings growth. The consensus sees $76 of operating EPS for the S&P 500 next year, which compares to a likely $56 stream in 2009. [Thomson Reuters said today that the current consensus estimate has risen to $59.87 a share for 2009.] In other words, that would imply an expected 35 percent profits boost this year. That in turn would require a 14 percent increase in nominal GDP, which is basically impossible.”
Rosenberg continues: “Okay—a spurt that stron was last posted in 1951, so let’s be fair. It’s a 1-in-58 event. In the past 75 years, there were a grand total of six when profit growth topped 30 percent, and guess what? The pace of profits required, on average, 10 percent grown in nominal GDP. And that last happened 25 years ago. Either way you slice it or dice it, achieving the consensus profit forecast is an extremely low-odds scenario.”
Well put.