S&P500 Earnings for 2007: Down -4.2%

At the beginning of 2007, the S&P500 was over 1,400, the Dow was just under 12,500, and the Nasdaq was about 2,500. Stocks, according to consensus estimates, were "cheap," and profit growth expected to be 10%+.      

With 90% of earnings reported by the S&P500 firms, we now have enough data to see how the full calendar year was for profits.

Here’s the overview from S&P’s Sam Stovall:

At the end of 2006, S&P equity analysts expected operating earnings
per share (EPS) for the S&P Composite 1500 (comprised of the
S&P 500, MidCap 400 and SmallCap 600 indexes) to advance 10% in
2007
, a healthy follow-up to the 15% gain seen in 2006.

Yet with 2007’s
results nearly final, we now find that EPS for the S&P 1500
actually sank by almost 4%
on a worse-than-expected fallout from the
housing, subprime, and credit crises.

Within the S&P 1500, the S&P 500 index, which represents
88.5% of the market value of the 1500, likely registered a 4.2%
year-over-year decline
, while the S&P MidCap 400 (7.8% of the 1500)
eked out a 0.1% gain, and the S&P SmallCap 600 (3.7% of the 1500)
fell 5.6%.

The 1500’s negative earnings results for the year were the result of
deteriorating profit growth for the Consumer Discretionary and
Financials sectors in particular, as these sectors posted declines of
17.8% and 33.3%, respectively, as of Feb. 19, 2008. The second half of
last year was the toughest for the overall market, as it suffered
through EPS declines of 9% in the third quarter and 22% in the fourth,
a quarter that many dubbed the "kitchen-sink quarter" as companies
wrote down everything—including the proverbial fixture. (emphasis added)

The relative performance of the mid-caps was likely due to the presence of many energy, commodity and agricultural stocks. Indeed, a few sectors have done rather well: The exporting industrials, anything Ag or energy related, consumer staples, utilities have all thrived. Financials, anything house related, many retailers, consumer discretionary all performed poorly.  I was a little surprised by the full year number, thinking the good sectors and the first half numbers might partially offset the second half.

What does this say about the market itself as a forecaster?

Short answer: The easy, glib readings — so favored by all too many ignorant media pundits — are all too often, wrong. Accurately interpreting the body language of Mr. Market is far more difficult and nuanced than the usual nonsense you hear peddled.

Here’s the amusing part: The same group of S&P equity analysts who foolishly were looking for a 10% advance in
2007, are now expecting a profits recovery in the second half of
2008. Their favorite sectors are (drum roll) Consumer Discretionary and Financials.

The thinking must be that the credit crunch will just go away, energy and food prices will drop, and the consumer will begin another wanton spending spree.      

Hmmmm. I suspect this S&P profit forecast to be every bit as prescient as the previous one . . .

>

Source:
Earnings: A Clearer Picture Emerges
Sam Stovall
February 26, 2008, 7:44PM EST
http://www.businessweek.com/investor/content/feb2008/pi20080226_304457.htm

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What's been said:

Discussions found on the web:
  1. Paul Jones commented on Feb 29

    They maybe commissars, but they’re OUR commissars!

  2. Max commented on Feb 29

    Their favorite sectors are (drum roll) Consumer Discretionary and Financials.

    I propose calling them them “monkey contrarians”.

  3. SINGER commented on Feb 29

    I wish I could get paid for being this wrong…

    ~~~

    BR: You can — get a job with the NAR!

  4. rickrude commented on Feb 29

    So hold the winners like oil and gold stocks.

  5. SM commented on Feb 29

    What do you expect? These are the same people who REALLY believe that ABK & MBI have stellar AAA credit.

  6. Faster Pussycat, Sell Sell commented on Feb 29

    Earnings can be down 4.2% or up -4.2%.

    If they are down -4.2%, it would actually mean they went up.

    Sorry for the nitpicking but precision in language mirrors precision in thought.

  7. mhm commented on Feb 29

    “precision in language mirrors precision in thought”

    On a deeper level, Wittgenstein might point out that the above cannot be optimized.

  8. D. commented on Feb 29

    The market is probably holding up because of investors moving from the crappy bonds to equities thinking equities protect against inflation. When profits really decline, watch out!

  9. Ross commented on Feb 29

    Operating earnings? S&P are the last folks I would let count the money in my piggy bank. On second thought, they would probably tell me that adjusted for what I took out, I need a bigger piggy bank…

    Let’s now get into creative accounting issues, adjustments for buybacks and continuing “one time” write offs and we can brush aside the pond scum and see our true reflections.

    Spin it anyway you want, this will not end well.

  10. Winston Munn commented on Feb 29

    “NEW YORK (Reuters) – An effort to arrange a rescue of trouble bond insurer Ambac Financial Group Inc (NYSE:ABK – News) has hit a significant snag over the amount of capital the banks involved would have to inject into the company….”

    Why am I not surprised?

  11. Howard Veit commented on Feb 29

    Obama will solve the credit “problem” in one shot: he will forgive all debts. Watch the market then wise guys.

  12. Stuart commented on Feb 29

    And watch bucky too.

  13. SFH commented on Feb 29

    I agree that overall the S&P500 should be crushed just as it has been from the beginning of the year when valued by earnings per share because there was a decline as anyone can see in the data. However, one can only wonder how much financials and housing impacted the overall average as the bulk of the decline came from these groups. I still think there is value to be found in areas that are working fundamentally even though they may not be working per say the charts. This year thus far in my opinion shows the weakness of trading indicies. You can crush the index but what needs to be sold to balance it out won’t be. Honestly you would have to zero out a number of the bank and housing stocks for them to be fairly valued on earnings since they are negative in a number of cases and are currently being priced by book value. If the selling of the index lets up any time soon there will be a price rebound in the babies that have been thrown out with the whole index.

  14. Bhupendra McLeod commented on Feb 29

    If Obama wins we’ll all sing KumBaya, have a Coke and a smile, and everything will be hunky dory. I’m sure the all our good buddies including the Chinese and the muslims will be looking forward to it.

  15. DonKei commented on Feb 29

    And these numbers don’t even include the fact that their earnings need to be discounted by the declining value of their dollars.

    I can’t wait for the Obama jubilee…

  16. N commented on Feb 29

    Thanks BR.

    But I disgree! Earnings are okay Ex. Banks, Ex. Brokers, Ex. Housing and Ex. Consumer!

    Earnings are Earnings – even if it means higher taxes/higher inflation due to higher energy prices and big profits for energy companies. They are supporting the index/hope/earnings.

    Financial firms will keep unwinding; The fed will keep cutting; the dollar will keep sinking; commodities will keep rising and earning will be A-OKAY – Ex. the above culprits!

    I think we can keep playing this game for a little bit more.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aQFTerb4XMU8&refer=home

    Feb. 29 (Bloomberg) — Financial firms are likely to face at least $600 billion of losses as the crisis triggered by the collapse of subprime mortgages batters banks, brokers and insurers, UBS AG analysts said.

    Banks and brokers stand to lose $350 billion, according to estimates from the global banking unit of UBS, the world’s largest wealth manager. Financial institutions have so far disclosed more than $160 billion of writedowns and credit losses.

    “We have to recognize the risk that the economy will suffer more damage than what consensus suggests,” Geraud Charpin, head of European credit strategy at UBS in London, wrote in a report today. “All the investment schemes that have been built on the basis of a strong and resilient economic backdrop have to be unwound/scaled down.”

    American International Group Inc., the world’s largest insurer, reported the biggest quarterly loss in its 89-year history yesterday after an $11.1 billion writedown on derivatives linked in part to subprime mortgages. London-based Peloton Partners LLP said yesterday it is being forced to liquidate a $1.8 billion hedge fund managing asset-backed debt because of tighter lending restrictions on Wall Street.

  17. Toro commented on Feb 29

    -4.2%. Pfft, that’s nothing!

    As of today, trailing earnings per share on the SP500 is $68.69 according to my Bloomberg. It peaked at $86.86 on August 3. That’s a decline of 20.9% since then.

    And analysts are expecting earnings of $97.68 for this year, lol!

  18. Street Creds commented on Feb 29

    Bubblevision Alert.
    It happened in a second but, Erin was interviewing someone from Kiplingers who told his story about a fund manager he shawdowed for two days. He mentioned the manager had their show on, and always went the opposite of their recommendations. The set became chilly, and he was off the air in 20 seconds. Interesting point was the manager took one dollar of investor assets, and turned it into 8 cents.

  19. john commented on Feb 29

    I’m not a fan of Obama’s but why do people say such transparently stupid things about him. Maybe I don’t find frat boy humor amusing. As to the real world. It seems clear the bottom is around 12,000 but we’re going to see a recession and lots of inflation. As long as you recognize this is the strategic landscape all can still be well if you own capital and know how to deploy it. Maybe President Obama will fire helicopter Ben. He should do this guy is bad news.

  20. Advsy commented on Feb 29

    Even worse to me are all the fools touting a strong economy by talking about S&P returns minus the financials. (Which are supposedly up nicely, but I would like someone to verify that)

    These are surely part of Barry’s inflation – ex inflation crowd.

  21. dukeb commented on Feb 29

    I love it when the ticker on money.com looses it! I just copied this at 1032am. Notice anything wrong with the S&P? Lol.

    DOW 219.48 -1.74%
    12,362.70

    NASDAQ 44.10 -1.89%
    2,287.47

    S&P 500 1,233.47 -90.19%
    134.21

  22. mhm commented on Feb 29

    “S&P 500 1,233.47 -90.19%
    134.21”

    Actually I just saw something similar on the Russell 2000…

    The AMTD screenshot, if you don’t believe:
    http://i30.tinypic.com/b89206.jpg

    Tweaking the system for the Friday afternoon run up?

  23. PureGuesswork commented on Feb 29

    Anyone want to buy some stock? I hear they are having one of those ” post-holiday sales” today in New York.

  24. michael schumacher commented on Feb 29

    the S&P “issue” is intermittent……..I too have AMTD….is it just a platform thing or is it a data feed issue?? Anyone know??

    Ciao
    MS

  25. Pat G. commented on Feb 29

    “At the beginning of 2007, the S&P500 was over 1,400, the Dow was just under 12,500, and the Nasdaq was about 2,500. Stocks, according to consensus estimates, were “cheap,” and profit growth expected to be 10%+. EPS for the S&P 1500 actually sank by almost 4%”

    So if we extrapolate 14% (or the difference between estimated and real earnings in 2007) from the levels of the S&P, DOW and Nasdaq then, they should be at 1204, 10750 and 2150, respectively. Currently they are at 1343, 12368 and 2289. A bit overvalued in my opinion. Besides, this does not reflect any additional drops so far in 2008 from 2007 levels based on “bad news” of which there has been plenty.

  26. John commented on Feb 29

    Barry,

    “Ignorant media pundits” — that’s redundant.

  27. ARISTOTLE commented on Feb 29

    Repeat after W “There is no recession”,

    “These are not the droids you’re looking for”

  28. MarkTX commented on Feb 29

    As I type
    Charles Schwab’s Quick quote(Bid/Ask)

    prints the spx (I cut and Pasted)

    Symbol
    SPX

    Last
    1,334.35

    Change
    -33.33

    Bid
    NA

    Ask
    NA

    High
    1,364.07

    Low
    1.33

    Vol
    N/A

    Time
    15:04:06

    It is Leap day……
    Maybe the market is taking a flying leap…..

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