2009 Earnings Estimates Are Too High ~ market folly

Monday, September 29, 2008

2009 Earnings Estimates Are Too High

I wanted to pull an excerpt off of Chad Brand's blog because he illustrates a simple point here: 2009 Earnings estimates are too high.

He writes,

"Below is the breakdown of earnings from 2006 through current 2009 estimates: Notice what while S&P 500 earnings will be down this year, for the second straight year, eight of the ten sectors are expected to have earnings gains for the third consecutive year in 2008, as well as further gains in 2009. This data shows exactly how much impact the financial sector's woes are having on the market. The consumer discretionary sector is an obvious casualty of such fallout, but everything else is fairly strong. Personally, I think 2009 earnings estimates remain too high, though they have come down some already. Although I think the odds are remote, it is easy to see that, when one assumes the financials will rebound sharply, such a high S&P earnings number is possible in 2009 because the other sectors remain on firm footing."

As you can see from his graphic, earnings estimates indeed seem way too high for 2009, considering the fact that the crisis has elevated in recent months. There is really a trickle down effect at work here. Financials will stink it up, we all know this. But, what so many people have seemingly written off (no pun intended), is the spillover effect into other sectors. Not to mention, you've got 2 separate crises at the same time. On one hand, you've got the credit crunch, and on the other hand you've got a decelerating consumer environment and a horrible housing market. While some aspects of each are intertwined, the spillover effect is still underestimated when you consider all the problems facing the economy as a whole. So, while we may just be starting to work through the majority of the credit crisis problems, we've got a whole nother set of issues to tackle with the housing market and debt-ridden, struggling consumer. Estimates will come down.

(click to enlarge)

Source: Chad Brand's Peridot Capitalist

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