Overly Optimistic Wall Street

Wall Street earnings estimates for the general economy are always overly optimistic.

This time last year, S&P500 full year 2015 earnings were estimated to be over $130…today those estimates have been revised down to less than $107.  (See below chart: Declining Earnings Estimates)

If the current estimates hold, then profits would be at a two year low comparable to when the index was trading at 1848…12% lower than today.  [Actual earnings will likely come in higher so that it can be reported that profits “beat” expectations.]

That takes us to the second chart, which shows that as earnings estimates have declined the index has been stubbornly resilient.  This divergence can’t continue, either earnings have to improve or stock prices will decline.

Thus my pessimism for the better part of this year; I don’t see an improvement in earnings.  Excessive debt and its resulting mal-investments will continue to be a drag on the global economy.  The near term future looks dim because storm clouds continue to build on the economic horizon…currency devaluations, insolvent commodity/energy debt, over capacity, and refuges flooding Europe.  Central bank intervention can’t solve all these problems.

Also note on the chart showing Declining Earnings Estimates, for next year Wall Street is forecasting S&P500 earnings that are 19% higher than today…ever the optimist !

Ignore the placating headlines and invest with caution.

Declining earnings estimates 151107

Divergence between index and earings 151107

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