The Outlook for United States Corporate Earnings

Article excerpt

EXPECTED GROWTH

The September survey of 4,082 security analysts affiliated with 338 institutional equity research firms, conducted by the Institutional Brokers Estimate System (I/B/E/S-U.S. edition), is forecasting a 16.8% increase in U.S. corporate earnings in 1999. The forecast is based on the United States I/B/E/S Universe of 5,649 publicly traded firms as of September 16, 1999. The expected growth rate for 2000 is 21.4%. 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 $44.33 on an operating basis in 1998. Operating earnings are expected to increase 15.2% in 1999 to $51.06 and grow 16.4% in 2000 to $59.43. For the S&P Industrials, earnings are expected to rise 14.7% in 1999 (EPS of $52.94 is expected) and growth of 18.5% is anticipated for 2000 ($62.59). For the Dow Jones Industrial Average (DJIA), earnings are forecast to rise 19.1 % in 1999 ($485.10) and rise 14.4% in 2000 ($554.95). S&P Midcap 400 earnings are forecast to rise 19.9% in 1999 ($20.16) and 19.1% in 2000 ($24.02). S&P Smallcap 600 earnings are forecast to rise 13.7% in 1999 ($8.97) and increase 33.1% in 2000 ($11.94).

Since our last writing in June, earnings forecasts have been pulled in two different directions by the second strongest earnings surprise since Q1 1998 and a slowing US economy. Much of the earnings surprise was a result of analysts failing to catch up with the rapidly improving earnings in the United States. Going forward, we do not expect to see such a large surprise. The consensus sees the Asian economies continuing their recovery and a reverse in the global earnings slowdown that spread to Latin America. Although analysts are forecasting 15.2% earnings growth for the S&P 500 in 1999, investors are realistically anticipating earnings growth of just 13% to 14%. 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. The broad-based rebound in earnings has failed to catch on to all of the industries in the Basic Industries sector due to intense competition from imports. The only cyclical commodity industries to show upward revisions in the past three months have been Forest Products, Natural Gas, Non Ferrous Metals, and Oil.

ESTIMATE REVISION TRENDS

A turnaround in earnings forecasts for Asia and Europe coupled with a strong Q1 and Q2 surprise in the U.S. has helped to temper the decline in earnings forecasts this year. The 1999 earnings expectations as measured by the broad aggregates have fallen at a slightly faster pace in the past three months due to a quicker erosion in expectations for the smaller companies. The 1999 mean estimate for the I/B/E/S Universe is down -1.7%. The change in the 1999 forecast over the past three months for the S&P 100 (-0.1%) and the S&P 500 (-0.4%) is the best index in the I/B/ElS Universe. The 1999 forecasts for the S&P Industrials, and the S&P Dow 30 Industrials have fallen -0.9 %and - 1.0%, respectively. Forecasts for the S&P Midcap 400 and the S&P Smallcap 600 have fallen -1.4% and -5.7%, respectively, in the past three months.

Forecasts for the S&P 500 have historically declined - 1.0%permonth. Over the past three months, the forecast has fallen an average of -0.1% per month, a deterioration from the +0.3% increase in the 2nd quarter, but better than the -0.7% decrease in the V quarter and -2.0% per month decline in the fourth quarter.

For the first quarter, analysts initially looking for earnings growth of 5.0% were shocked and delighted to see final growth come in at +9.5%. For the second quarter, analyst expectations for earnings growth of +11.3% for the S&P 500 profits were also beaten as final growth came in at +13.6%. For the 31d quarter, analysts are currently expecting earnings growth of +21. …