Tuesday, November 18, 2008

Surprise (Not)-Analyst Estimates Extremely Over-Optimistic

Back in early May, when I argued that the sucker's rally at that time in the stock market would end, I argued that the earnings forecast of so-called professional analysts were widely over-optimistic. Although I didn't in the post mention the estimates for the third quarter (I only mentioned the estimate for the fourth quarter), the Bloomberg article I linked to mentioned that analysts at the time forecasted an increase in profits of 12.1% for the companies in the S&P 500 in Q3 2008 compared to Q3 2007.

Now the numbers are in: profits fell 21.6%.

The 51.1% increase for the fourth quarter forecasted in May by analysts will almost certainly be even more incorrect. The change number for Q4 2008 will be greatly boosted by the fact that Q4 2007 was depressed by large write-downs. But I suspect that not even that base effect will prevent profit growth from being negative anyway. Considering the fact that house prices are falling at an ever faster rate, losses for financial companies will continue to be great. Meanwhile, the deep slump and the strong dollar is causing profits for non-financial companies to fall too. Also, the story about final earnings for Q3 2008 that I linked to mention that the one bright spot was higher profits for energy (i.e. oil) companies. But with the dramatic plunge in the price of oil, oil company profits will likely not only stop growing, but start falling.


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