The Outlook for United States Corporate Earnings

Article excerpt

EXPECTED GROWTH

The June survey of 3,983 security analysts affiliated with 328 institutional equity research firms, conducted by the Institutional Brokers Estimate System (I/B/ E/S-U.S. edition), is forecasting a 18.0% increase in U.S. corporate earnings in 1999. The forecast is based on the United States I/ B/E/S Universe of 5,723 publicly traded firms as of June 17, 1999. The expected growth rate for 2000 is 20.8%. The expected 1999 growth rates for the Major Market Indexes are generally lower. Based on the current composition and shares outstanding, the S&P 500 earned $44.00 on an operating basis in 1998. Operating earnings are expected to increase 16.5% in 1999 to $51.24 and grow 16.4% in 2000 to $59.66. For the S&P Industrials, earnings are expected to rise 16.1% in 1999 (EPS of $53.31 is expected) and growth of 18.1 % is anticipated for 2000 ($62.97). For the Dow Jones Industrial Average (DJIA), earnings are forecast to rise 16.5% in 1999 ($490.01) and rise 13.7% in 2000 ($557.18). S&P Midcap 400 earnings are forecast to rise 15.3% in 1999 ($20.45) and 18.0% in 2000 ($24.14). S&P Smallcap 600 earnings are forecast to rise 15.8% in 1999 ($9.51) and increase 29.5% in 2000 ($12.32).

Since our last writing in March, earnings forecasts have essentially risen or held up very well in the wake of the tremendous positive surprise reported in the 1I quarter earnings season. Analyst expectations for QI earnings were beaten by better than +5%, the strongest earnings surprise since 1988's Is quarter surprise of +8%. Granted, much of the earnings surprise was a result of earnings expectations that were cut too severely in the wake of the global financial and economic turmoil after the Crash of 1998. Going forward, we do not expect to see such a large surprise. Good vibes associated with Asian and Latin America. The consensus continues to see the Asian economies bottoming out and earnings recovering later in 1999. The global earnings slowdown that began to spread to Latin America and Europe has essentially stopped and is now reversing course. Although analysts are forecasting 16.5% earnings growth for the S&P 500 in 1999, investors are realistically anticipating earnings growth of just 10% to 15%. The actual timing of each industry specific earnings recovery has taken on the first-in, first-out approach. The first industries to be affected by the Asian crisis are now the first industries with profits recovering. To date, we do not see evidence of a broad-based rebound in earnings forecasts for firms in the Basic Industries sector. Rather, we are seeing a slowdown in the rate of decline or perhaps even a temporary bottom in a world still suffering from excess capacity. The only cyclical industries to show upward revisions in the past three months have been Forest Products and Home Building.

ESTIMATE REVISION TRENDS

A turnaround in earnings forecasts for Asia and Europe coupled with a strong QI surprise in the U.S. has helped to temper the decline in earnings forecasts in the past three months. The 1999 earnings expectations as measured by the broad aggregates have fallen at a slower pace in the past three months. The 1999 mean estimate for the IB/E/S Universe is down -1.2%. The change in the 1999 forecast over the past three months for the DJIA 30 (+8.3%) is the best index in the IB/ E/S Universe. The 1999 forecasts for the S&P Smallcap 600, and the S&P Midcap 400 have fallen -2.7% and -1.9%, respectively. Forecasts for the S&P 500 and the S&P industrials have risen +0.9% and +0.4%, respectively, in the past three months.

Forecasts for the S&P 500 have historically declined -1.0% per month. Over the past three months, the forecast has increased an average of +0.3% per month, up from and -0.7% in the I" quarter and -2.0% per month in the fourth quarter and substantially above our expectations of 1.8% decrease. The variance is attributable to the estimate increases that occurred in the Truck Manufacturing, Automotive, Home Building and Semiconductor industries. …