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I'll start my analysis with a look at analysts' expectations. The earnings picture on the S&P 500 remains robust. The consensus estimate for forward 52-week EPS on the index now stands at $96.21 (blue line on this first chart). This projection uses Standard & Poor's quarterly estimates for 2007. However, because S&P hasn't begun publishing '08 estimates, I'm using my preliminary top-down estimate of 7% year-over-year growth for the first quarter of 2008. Trailing operating EPS (pink line) are at $87.08. Trailing reported EPS (yellow line) are at $83.83. Quality of earnings also remains excellent, with only a very narrow gap between operating and reported EPS. (There are not a lot of accounting tricks being played to jazz up earnings reports.)
Each of these EPS lines is roughly 50% higher than it was at its peak in late 2000. Meanwhile, the SPX is about 130 points below its '00 high.
What we see on this chart is that on a sector-by-sector basis, earnings trends are constructive, especially in financials, health care, information technology and telecom services. But the most recent developments in the oil patch suggest that there may be some give-back in that sector. Projected trends for the coming 52 weeks show energy as the only sector with significantly below-trend EPS growth.
The problem persists, however, as to just how 8 of 10 SPX sectors will enjoy EPS growth well above the long-term market trend (+7%) with the S&P's forward 52-week EPS growth currently projected at +10.5%, with nominal GDP growth projected to be less than 5% in '07 (2.5% real growth plus about 2.4% inflation equals 4.9% nominal GDP) and with profit margins already extremely fat. The difficulty of this set of projections coming to fruition is illustrated in this next chart. It illustrates how things would have to play out in terms of corporate profits (with adjustments for inventory valuation and capital consumption) as a percentage of gross domestic product.
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At the time of publication, Oliensis had no positions in any of the stocks mentioned, although positions may change at any time. Adam Oliensis is president of Dog Dreams Unlimited, a guaranteed introducing futures brokerage, and editor of the trading service The Agile Trader. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Oliensis appreciates your feedback; click here to send him an email.
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