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Ready for the Upcoming Decline in S&P Earnings Estimates?

Chad Karnes

Dear C-Suite executives and Wall Street analysts, I know the games you are playing. And it’s time your financial perversion is rightly exposed!

On Monday, the Dallas Fed released data that showed new orders declined at the fastest rate since April 2013 as the general business activity index fell to five month lows on the back of slowing manufacturing (XLI) activity.

Slowing manufacturing activity however is nothing new as companies’ revenue (RWL) and earnings (EXT) growth rates have reflected the continued slow down in the fundamentals for years now.

Check out the chart below that graphs revenue and earnings growth rates of change for the S&P 500 (RSP) companies since the year 2000.

In blue, revenue growth recently peaked in early 2012 around 8.5%/year and has been declining since, now at just a 3.1% rate of growth.

Earnings is displayed in red, and is in a similar boat.  After peaking in mid-2011 at 47%, earnings are now growing 13% from June 2014 to June 2014.  As most are aware, both revenue and earnings growth peaked in the early 2000s.

Revenue and Earnings Growth Slowing


Sales growth remains slow, well below long term averages, and is a reason why lofty earnings (EPS) estimates for 2014, and especially 2015 are likely not to be reached, no matter what CEOs and Wall Street continue to try to sell us.

Earnings Estimates continue to be Ratcheted Lower

Check out the next chart which shows the recent history for 2014 and 2015 full year earnings estimates as well as the run rate projections.

Since they were first introduced in March 2013, 2014’s earnings have been lowered by around 1% each quarter.

2014 and 2015 Earnings Estimate History

In the chart above, I have run rated the 1% estimated decline in estimates to conclude what actual earnings likely will be at the end of 2014 and 2015.

In reality I expect this number to still be too generous as recent history shows large earnings estimate declines occur in the 3 rd quarter of each year, just in time for analysts and CEOs to cover up the miss by shifting investor attention to the next year’s also too lofty earnings.

How’s this for a track record?

As I discussed in my article, “Why you should Finally Pay Attention to Earnings”, and in my more recent article, “S&P 500 Earnings Growth Still Below Historical Norms”, I explain why lofty future earnings expectations are nothing new.

Early last year, 2014’s operating earnings were expected to be over $125 per share.  That’s not going to happen.  This was the number used to dupe investors into thinking they were buying a 2014 15x P/E market.  This number has already been reduced to under $120, with likely much farther to go if history is any guide.

As Wall Street keeps you focused on a make believe 2015 earnings estimate (that in reality will never be met), in the meantime the S&P (^GSPC) is trading for 19x real, reported, earnings, yet Wall Street still throws out a 15x P/E every time they talk of earnings.

Analysts have made it a habit to estimate overly optimistic earnings early and then shift investors’ attention to the following year’s overhyped earnings just as the current year starts to fail to impress.

WATCH: Why Corporate Balance Sheets are not Improving

This final graph from Yardeni Research proves how analysts and CEOs almost always overestimate earnings for future years, only to ratchet them down through time as reality sets in.

Yardeni earnings

Notice how the green line is rarely ever above the blue line’s beginning, and usually is far below it?

Next quarter this trend will likely continue as analysts and CEOs try to shift your focus on 2015’s made up earnings estimates, and 2014 will be just another year that fails to live up to its operating earnings estimates of $119 per share.

As Wall Street continues with its old tricks, the ETF Profit Strategy Newsletter slices through their nonsense with fundamental, sentiment, and technical research to keep investors informed, sober, and ready.  We track stock, bond, currency, and commodity markets via our monthly, weekly, and daily updates.

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