David Einhorn sent us his most important chart of 2015

The year is coming to a close, which means it’s time to review what we’ve learned about financial markets.

To do that, Business Insider reached out to some of Wall Street’s brightest minds to get a sense of what they’re reflecting on. We asked them to share an important chart, lesson, or idea they had this year.

David Einhorn, founder of Greenlight Capital sent us the chart below. It is the Netflix share price plotted along with estimates for earnings at the S&P 500 in 2015, 2016 and 2017.

Netflix is the S&P 500’s best performing stock of 2015, with a 142% gain so far. Einhorn’s chart shows that the shares have been rallying as earnings estimates for the broad market have been falling. (Netflix shares are the light grey line, while the red, blue and green lines are the S&P 500 earnings estimates.)

There’s been a similar decline in expectations for Netflix performance. Einhorn pointed out that Netflix surged all year despite the fact that analysts lowered expectations for its short and intermediate term performance every time the company reported results.

Einhorn netflix chartPlay GIFDavid Einhorn, Greenlight CapitalNFLX stock rises while estimates fall.

It can be taken as a sign of the market’s disconnect from reality. At various points in the year, investors have had reason to worry about Netflix’s revenue, cash burn, and US subscriber additions and still the shares have outperformed the rest of the S&P 500 by a wide margin.

And the analysts who cover this company have been lowering their expectations for earnings throughout the year, while they also boost their target price for the stock, according to Bloomberg data.


This disconnect could right itself as the broad decline in earnings per share creates broadly bearish sentiment that forces investors to ask harder questions of Netflix and the analysts.

The question is whether or not the market will wake up to that.

According to Factset, more companies are lowering estimates for the final quarter of the year than the average over the last five years.

“Of the 110 companies that have issued negative EPS guidance for Q4, 84 have issued negative EPS guidance,” according to an analyst note from the data provider.

That said, Factset also points out that analysts expect earnings growth to return next year. It sounds like a contradiction given the trend toward downward earnings revisions we’ve seen all year. If things end up looking bad once earnings season kicks off, the downward revisions trend may well continue into 2016.

There is a bullish reading of Netflix performance of course. If the company does end up dominating media all over the world over the next decade, then its spending — which bears have said is unsustainable — is vital and, and its long-term its value is truly much greater than it is even today.

If Netflix creeps higher on bad news, think of what it will do when the news is good. That’s one way to look at it.

Happy New Year.

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