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Profit Estimates Require Leap of Faith

'Tis the time of year when we traditionally take stock of where we've been, count our blessings and ponder what the future holds.

For investors, 2006 was a year of surprises. Few would have predicted at the start of the year that S&P 500 earnings growth would actually accelerate in 2006 -- up 14%, compared with a 12% gain during 2005 -- and that the stock market would applaud with a powerful rally.

And, contrary to conventional wisdom, small-caps have outperformed large caps yet again, as stocks in the iShares Russell 2000 (IWM) index delivered 23% earnings growth. As they say, it's tough to make predictions, especially about the future.

Of course, we're not going to let that stop us, so here's our best guess at where the growth will -- and won't -- be in 2007. Using current consensus estimates for the index constituents, we've calculated anticipated 2006-07 earnings growth of various well-known broad market exchange-traded funds.

Estimates for next year range from a high of 27% for the small-cap iShares Russell 2000 index fund to a low of 6% for the large-cap iShares Russell 1000 Value (IWD) fund. The benchmark Dow Industrials and S&P 500 are forecast to have 10% and 9% earnings per share growth in 2007, respectively.

Where The Growth Is
Estimated EPS Growth
Ticker Fund 2007E Change 2006E Change
IWM iShares Russell 2000 26.50% 22.80%
QQQQ NASDAQ-100 Tracking Stock 22.90% 18.80%
IJR iShares S&P SmallCap 600 15.40% 14.10%
IWF iShares Russell 1000 Growth 14.50% 15.60%
MDY S&P MidCap 400 SPDR 13.30% 13.70%
PRF PowerShares FTSE-RAFI U.S. 1000 10.90% 21.60%
IVW iShares S&P 500 Growth 10.70% 10.10%
DIA Dow Industrials DIAMONDS 10.10% 29.40%
SPY S&P 500 SPDR 8.90% 14.10%
IVE iShares S&P 500 Value 7.90% 16.80%
DVY iShares DJ Select Dividend Index 6.60% 13.70%
IWD iShares Russell 1000 Value 5.80% 13.50%
Note: Using consensus estimates for current index constituents, ranked by 2007E YoY EPS growth

Like the year now ending, one thing we can say with confidence about 2007 is that a year from now, we'll probably look back and see many areas where conventional wisdom proved wrong. In particular, we find it hard to believe that the growth estimates at the top of the range will actually be realized.

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