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Downward Earnings Revisions Next Up!.

  • Written by Syndicated Publisher 290 Comments290 Comments Comments
    September 16, 2011

    Economists and Wall Street were first very reluctant to lower their forecasts of impressive economic growth for 2011, last fall expecting growth for the year of 3.5% to 4.0%. Even as the first quarter earnings reports began coming in showing surprising declines across the economy, they pretty much stuck with their rosy forecasts.

    Even though reports for the 2nd quarter continued to deteriorate, it was not until GDP growth for the first quarter was originally reported at only 1.8% that they began to reluctantly lower their forecasts for the 2nd quarter. Even then they maintained that it was only a temporary soft spot and robust recovery would take place in the 2nd half and next year.

    Only after first quarter growth was then revised down to an almost non-existent 0.4%, and 2nd quarter GDP growth came in at only 1.0% did they begin to more seriously lower forecasts for the year to the current average of about 1.0%.

    And still most of the monthly reports continue to come in worse their estimates, indicating they are still behind the curve.

    Throughout the downward GDP revisions, I was constantly wondering out loud how they had come to expect such a dramatic economic slowdown, but had not budged on their forecasts of earnings growth for companies operating within that slowing economy. But they continued to insist that earnings for S&P 500 companies would hit further record highs this year and next. And that is Wall Street’s justification for claims that stocks are underpriced since they are selling at reasonable price/earnings ratios based on earnings estimates.

    But it appears it’s finally the turn of earnings estimates to be downgraded.

    The Wall Street Journal reports this morning that Wall Street’s average forecast for 2012 earnings growth by 35 industrial companies in the S&P 500 index is now at 16%, down significantly from 19% at the end of June.

    And earnings estimates for the financial sector have been tumbling for some time, along with their stocks.

    Ed Yardini of Yardeni Research is quoted as saying that one sign of lower corporate earnings is the abrupt slowdown in the rise of corporate-tax receipts, which were up only 12% in the 12 months through August, much lower than their 61% rise in the 12 months through last January.

    Is Relief over Greece Really Driving The Rally This Week?

    As usual, the financial media takes the simplistic approach of watching to see which way the market is going and then picking out a headline that it credits with being the catalyst for the market’s rally or decline.

    The market is up so far this week.

    So from among the dire headlines; warnings from the World Bank that the global economy is now in the danger zone and major nations have procrastinated so long on the necessary hard decisions that they have few viable choices left; that “France’s Top Banks Are Rocked By Moody’s Rating Cuts”; that “The SEC is Widening Its Probe of Major Banks”; the continuing deterioration of economic reports; and so forth, it picks a headline that ‘France and Germany are assuring markets that Greece will not be defaulting on its debts anytime soon’ as the reason the market is rallying this week. Their typical headline being “Stocks Rally on Greek Relief’.

    Is it again not more likely that the market’s direction this week was pre-ordained by its technical condition before German and French leaders even made their statement?

    As we showed you last Saturday, on Friday the market had plunged back down to the potential support at the bottom of the rising trading band within which it has been confined since mid-August.

    And as we told our subscribers in the premium content area, the weekly market patterns were also calling for a positive week this week. (Last week was the week before the quarter’s quadruple-witching expirations week and was down sharply. The history is that in that event the pattern is for the week of the expirations, which this week is, to then be positive).

    And then there was that our short-term technical indicators, one of which is shown in the next chart, remained on the short-term buy signal from mid-August.


    Those factors seem much more likely to have been the reason for the positive market so far this week, than one minor encouraging story from Europe out of the dozens of discouraging ones.

    Gold In Trouble?

    Gold spiked up and has been by far the most widely recommended holding.

    But in the process it became very overbought above its important 30-week moving average.



    Is the short-term sell signal on technical indicators and subsequent short-term decline just another pullback to retest the support at its short-term 30-day m.a., or the beginning of something more serious?


    To read my weekend newspaper column ‘Prepare For A Recession and Bear Market!’ click here!


    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!


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