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Profit Estimates Require Leap of Faith

P/E Ratio On Estimated 2007 EPS
Click here for larger image.

Among international ETFs, the iShares MSCI Canada fund (EWC) is estimated to have the fastest EPS growth next year, at 15%, though down from 20% this year.

At the opposite end, somewhat surprisingly, is the iShares FTSE/Xinhua China 25 (FXII), with just 4% growth for 2007 compared with 16% this year, and a huge deceleration in earnings growth for the iShares S&P Latin America 40, (ILF), where earnings growth is expected to slow to just 3%, down from 26% this year.

That said, we think it's important not to get caught up in the growth figures for any one year. Amid all the gnashing of teeth on Wall Street about the apparent slowdown in earnings growth, we'd point out that the anticipated 9% earnings growth for the S&P 500 in 2007 is still well above the historical average of just 6.3% annual earnings growth since World War II.

Plus, historically speaking, there is almost no correlation between earnings growth and stock prices in any given year (because changes in interest rates and inflation, price to earnings levels and expectations about the future and other factors also exert a large impact on stock prices).

As a result, we think it makes sense to concentrate on areas with achievable earnings targets, where more reasonable valuations leave room for error in an uncertain world.
Michael Krause is president and founder of AltaVista Independent Research. AltaVista provides fundamentally driven analysis of exchange-traded funds to help investors select ETFs based on investment merit, much the same way they would evaluate a single stock. The firm offers both print and online ETF research to subscribers, but does not manage clients' money. Mr. Krause is also a frequent contributor to broadcast and print media.
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