May earnings season has been huge. 71.5% of analyst earnings revisions, in response to the latest earnings data, have been upward according to data from Citi’s Tobias Levkovich.
So it still stands — one of the trends below will have to be proven wrong. Either analysts’ new earnings upward revisions are way too bullish and will have to be pared back… or markets are over-reacting right now by forgetting that the outlook for corporate earning is getting better and better. Europe tanked and U.S. markets are tanking right now.
The likely situation is that analysts aren’t considering a further European financial crisis, or major China slow-down, as their base case scenario when making estimates. After all, they are only allowed to present a single most likely scenario when calculating forward earnings, and thus by the nature of the earnings estimates system are forced to ignore potential lower probability/high impact risks such as a European crisis spreading to core European nations.
Meanwhile, the stock markets appear to be doing the opposite, moving on these lower probability (as in less than 50%)/ high impact potential scenarios, and thus falling.
Which means that if European concerns end up stabilizing, and analyst estimates turn out accurate (they do now and then), then stocks will have a long way to run in order to catch up with the rising earnings forecasts shown above.
(Chart via Citi, PULSE Monitor, Tobias Levkovich, 14 May 2010)