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 Quote) 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 Quote) 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.