A Negative Earnings Revision Is No Reason To Sell Stocks

Wall Street’s analysts have a very
long and consistent track recordof overestimating the future earnings of the companies they cover.

Because of this well-known record, markets have gotten used to negative earnings revisions. In other words, this specific type of bad news is generally priced into the markets and is not a good reason to sell stocks.

Estimates for 2014 are already tumbling.

“The above-noted S&P 500 2014 EPS estimate downgrades are in fact no worse than in-line with the long-term (post-1987) “average annual earnings estimate revision trend” — i.e. estimates typically “start high” and are whittled down over time — which itself implies roughly another 7.5% downside to 2014 EPS before the “typical” revision process will have run its course (Figure 36),” said Nomura’s Michael Kurtz. “This would imply that bottom-up 2014 EPS eventually settle at roughly US$111.0/shr. — a deeper cumulative downgrade than our own top-down modelling suggests, or indeed than we ourselves expect.”

Kurtz is expecting $US112.50/shr. in 2014 for the S&P 500. He sees the index ending next year at 1,925, up 7% from current levels.

This is not to say earnings aren’t important for stocks. It’s just that the markets know those forecasts are coming down.

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