Chart of the Day: US earnings revision

A great chart from Dr Ed Yardeni’s blog on the US S&P500 earnings bonanza (note that the US reports quarterly, Australian corporates half yearly).

The chart is a weekly update of analyst’s average forecast of quarterly earnings. Note the substantial upward revisions to Q1 thru Q3, with an estimated looking through growth rate of some 16.3%. However, there are some danger signs ahead, most evident by the purple waterslide that is Q4 earnings estimates.

As Dr Yardeni spells out:

1. Q4 expectations continue to slide – analysts lowered their Q4 estimate for the thirteenth week in a row to slightly below the latest actual/estimated number for Q3

2. Expectations for 2012 are also on a slippery slope -The consensus for next year’s S&P 500 operating earnings fell to $108.45 at the end of October from a peak of $113.83 during the week of August 5.

Joe and I expect it will fall to $100 by the end of this year, and that it will be the actual outcome in 2012

What does this mean for Aussie investors? Note that our sharemarket is firmly coupled with the US, in terms of price movement and Price-Earnings ratios, regardless of the fact that our economies are totally different and our markets have completely different composition (the ASX200 should be renamed the ASX8 as I’ve explained before – residential housing investment trusts and primary resource extraction, vs. the advanced industrial companies that make up the US bourse)

The consensus of flat to declining earnings – i.e no real earnings growth – means a compression in P/E ratios which at best means a topping of US equity market valuations, which implies a similar dynamic down under.

Although Australian broker forecasts are currently running at 10-13% earnings growth for next year, with credit growth still anemic and terms of trade breaking down, it appears this too maybe a bridge too far even for the ASX8.

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  1. “Note that our sharemarket is firmly coupled with the US, in terms of price movement”

    correlated yes but firmly coupled? not what my common base charts say. if our market was “firmly coupled” with the US we would be closer to 5000 points than 4000 ponts. nice attempt to make the data suit your bearish veiw though.

    • yes i did! thanks for asking. but its not true.

      if you put a common base chart of the xjo and SP500 over the past 2 years you can clearly see the 2 have diverged (decoupled?) significantly since september last year. the out performance of the SP500 over the xjo is pretty significant. Over the last 2 years if you put 100 as the base value the xjo has gone down to 92 while the sp500 has gone up 117. I dont know why. maybe has something to do with the AUD hitting parity around that time but have look. i wouldnt call that “firmly coupled”

      • shouldn’t you be using common units if you want to make a direct comparison?

        e.g. ASX in US dollars vs S&P

        • yes, good point and would be worth looking at. I dont know how to do that though. but thats not the context in which the post or the comments were made

          “What does this mean for Aussie investors?”

          they are buying in AUD

          • if you put a common base chart of the xjo and SP500 over the past 2 years you can clearly see the 2 have diverged

            It all went into the currency.

            You mean you don’t feel richer with the AUD at $1.05 compared to when it was 60-something in early 2009?

            Australians can all share in the mining bonanza by investing in mining shares. Ask Fanboy! Problem is, they’ve done precisely nothing for over two years now while the miners have been absolutely raking it in.

  2. Tedblack44MEMBER

    Look at Bloomberg charts ASX:IND vs INDU:IND for the last 6 months they are in lock step. Big decline in the ASX when the $A went up.