The economic forecasting group of Merrill Lynch have been out front of most others in seeing the extent of the economic slide. Here is their lead in for the report on prospective earnings.
Taking a knife to our earnings forecast
We are taking a knife to our earnings forecasts for this year and next. We will also explain how that can be the case a week after raising our real GDP projections.
First, the numbers
We are taking our 2009 operating EPS forecast for the S&P 500 down to $46 from our prior call of $56. For 2010 we are now at $55.50 from our earlier estimate of $63. This means 2009 operating earnings are seen declining 16.4% from whatseems will be a final figure of $55 for 2008 (that compared with our prior expectation of -12%). While we have taken the LEVEL of profits down in 2010 visà-vis our most recent forecast, the growth rate is now seen at +20.7% as opposed to +12.5%. For those looking for a silver lining, at least we are going to have a deeper bottom to bounce off. Applying a classic recession-trough multiple of 12x against a forward EPS estimate of $55 would imply an ultimate low of 666 on the S&P 500, likely by October if our estimate of the timing for the end of the official downturn is accurate.
Unprecedented three-year decline in operating earnings
If we are anywhere in the ball park, this would mean an unprecedented three-year decline in operating earnings and a near-50% decline from the peak. Even with the expected rebound in 2010, earnings will still be almost 30% shy of the 2006 peak. Reported earnings of $28 this year and next would represent a 66% slide from the cycle peak and they are still 55% away from the cycle peak by the end of next year. We have data back to the mid-1930s and not once have reported earnings slid this much over a three-year span.
On track for the first negative as-reported quarter ever
As for reported EPS, these forecasts have changed radically, largely due to the relentless wave of write-offs, which have transcended what is happening in the financial space. Close to 80% of the S&P 500 companies have reported 4Q earnings with results on track to show the first negative “as reported” quarter in history – of over $9 per share. The financial sector has remained the frontrunner in the write-off phase, but many other sectors including energy, materials, tech and consumer discretionary are also in the process of either cleansing their balance sheets or simply reporting losses because of the deepening recession.