Tobias Levkovich at Citi highlights that, once again, the percentage of companies experiencing upward earnings revisions has spiked. At one point in October, 74% of companies had received higher earnings adjustments from analysts, shown by the blue line below. Yet this has eased back as of late.
Citi remains cautiously bullish on the market going forward.
Tobias Levkovich: Indeed, even the earnings revision trends that had spiked to 74% upward revisions back in October have moderated back to about 64% of late (see 6 Figure 15) and things may be setting up for a January rally as strong earnings reports and pre-announcements emerge. Indeed, the very recent slight “panic” readings are supportive of a rally within the next six months. Thus, we perceive that there are mixed signals and markets can move higher on such uncertainty early in 2010.
Other sentiment indicators aside (Citi goes through a long list of them to arrive at the above conclusion), while earnings revisions have spiked recently, it may not be cause for alarm… yet. Most upward revisions so far are likely corrections of the overly bearish estimates analysts made during the end of 2008 and early 2009.
Nobody wants to see a huge spike in earning revisions already baked-into stocks, it’s surely a red flag worth investigating, but at the same time it’s not automatically bad news. For example, for the U.S. economy as a whole, it’s comforting to know that many companies have higher earnings expectations today than six months ago.
(Via Citi Investment Research, ‘The Late Year Attitude’, Tobias Levkovich, 24 December 2009)