U.S. Corporate Earnings Forecast - Major Market Indexes

By Ventrelli, Stephen | The Journal of Business Forecasting Methods & Systems, Winter 1994 | Go to article overview

U.S. Corporate Earnings Forecast - Major Market Indexes


Ventrelli, Stephen, The Journal of Business Forecasting Methods & Systems


The Institutional Brokers Estimate System (I/B/E/S) maintains a database of earnings forecasts from over 2,375 security analysts affiliated with 170 institutional research and brokerage firms, following 4,212 companies. According to the December data, analysts are expecting operating earnings growth for the U.S. I/B/E/S universe of 19.4% for 1993 and 20.9% for 1994. Although the growth rates for the major market indexes are lower, there are many positive signs in the data. Analysts expect 1993 earnings for the S&P 500 to expand 16.2% to $27.08, while it is predicted that 1994 earnings will to grow 17.7% to $3 1.86. If these estimates eventually come to pass, S&P 500 earnings would be above the all time record of $25.39 set in 1988. Earnings for the S&P 400 are expected to grow 14.3% to %2X.43 for 1993 and 19.7% to $34.02 for ]994. For the Dow Jones Industrial average, the growth rates are 19% ($205.00) for 1993 and 20.6% ($247.28) for 1994.

Estimate Revision Trends-Major Market Indexes: Since September, the estimates for the major market indexes have all declined. The aggregate I/B/E/S universe has posted three month mean estimate declines of 1.7% for 1993 and 2.0% for 1994. Over the same time period, the S&P 500 (used most often as a proxy for the market) recorded estimate declines of 0.8% for 1993 and 1.9% for 1994. These reductions are not as severe as the historical estimate declines of about 1.0% a month. Interestingly, the S&P 500 1993 earnings forecast actually increased 0.1% during the month of November, which was the first monthly increase in over four years. Earnings projections for the S&P 400 were cut 0.5% and 3.1% for 1993 and 1994, respectively, over the past three months. Lastly, the estimates for the Dow Jones index fell 1.2% (1993) and 3.1n(1994)over the same time period.

THE ECONOMIC SECTORS

1993 Sector Growth Outlook: Looking at the individual sectors in terms of projected earnings growth, the Consumer Durables sector possesses the highest growth rate, as composite 1993 earnings are predicted to rise 175.7% above the level reported in 1992. This can be primarily explained by the fact that Consumer Durables is dominated by the highly cyclical Automobile Manufacturing industry. The second and third highest growth rates were posted by the Transportation and Financial Services sectors, with estimated earnings increases of 56.6% and 32.3%, respectively. Consensus earnings forecasts for Transportation are being compared to a very low base and Financial Services has been helped by the continued low interest rate environment and improving bank asset quality. At the other end of the spectrum, the sectors with the lowest 1993 earnings growth rates are Health Care (7.5%), Basic Industries (3.9%) and Consumer Non-durables (0.6%). Sector specific factors are at the root of the declining profitability of each of these economic groupings. For example, the uncertainly over President Clinton's impending health care plan and its potential impact an the future earnings of the Drug industry have dimmed the earnings outlook for the Health Care sector. Lower commodity prices and decreasing consumer loyalty in the Tobacco industry have contributed to the poor estimate performance of Basic Industries and Consumer Nondurables, respectively.

1993 Sector Estimate Revision Trends: Securities analysts have increased their earnings projections for two of the 11 sectors over the past quarter. Consumer Durables can boast the highest 1993 mean increase of 6.1%, while the Financial Services sector placed second as consensus earnings forecasts rose 1.1%. Mean earnings for the Public Utilities sector remained unchanged for the quarter. The remainder of the sectors suffered declines in estimated earnings over the past three months. Most severely affected was Consumer Non-durables, Basic Industries and Transportation. The deterioration of the earnings outlook for the Airlines industry has led the Transportation sector to post the largest three month estimate decline of -11. …

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