Morgan Stanley Research channels our prior discussion on earnings during recessions:

“We have heard investors suggest $80 in EPS was a fair bear case for 2012. We decided to look at history as a guide in assessing the bear case EPS. The 2001 recession saw a 13% revenue decline and a 57% EPS drawdown. The 2008 recession saw a 14% revenue decline and a 51% EPS hit, peak-to-trough. For 2012, bottom-up estimates (excluding financials) embed a 5% revenue INCREASE and just over 10% year-over-year EPS growth. If prior recessions prove relevant to next year’s economy, $54 to $68 in EPS in 2012 would be a more likely range than the $112 that the bottom-up consensus estimates currently embed.”

What should SPX prices be? Depends upon how much earnings fall during the coming slow down/recession. If we get a pre-2000 recession drop of 15%, then we are priced fairly. A 2001-recession like drop of 25% means more downside. Of course, the 2008 outlier — earnings plummeted 44% during the credit crisis  — well, that means a whole lot more downside work in equities . . .


Hat tip Sam Ro

The investor’s dilemma: Earnings, valuations and what to do next (September 11th, 2011)

Is the S&P500 Cheap? (August 29th, 2011)

McKinsey: Equity Analysts Are Still Too Bullish (June 2nd, 2010)

Category: Analysts, Earnings

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Read It Here First: MS Earnings Concerns”

  1. tradeking13 says:

    So, best case scenario is the market is fairly valuated? Time to put some idle cash to work — NOT!

  2. rd says:

    The various indicators that smooth corporate results over multi-year periods (CAPE, Q, etc.) have been screaming that the S&P 500 has been consistently over-valued for over a decade now and reached over-valuation territory again in the past year.

    It is quite clear that the Fed has equated achieving over-valued asset prices, including houses, equities, bonds, and commodities with being a proxiy for meeting their dual mandates of managing inflation and employment during the last half of the Greenspan era and the entire Bernanke era.

  3. cfischer says:

    What would have been the 2008 number if we exclude the financials?

    Tradeking, that is IF we get a recession – I’m in the camp that we do as most of our problems were simply papered over before and a lot of stimulis is puttering out, but that doesn’t make a certainty either. A similar thing happened last Summer, too.

  4. seana0325 says:

    Just for shits and giggles, where would SPX have to close on Sept 31st, to still be considered in the uptrend you’ve been eyeballing?

  5. ben22 says:

    I trust most TBP readers can see the faults in this analysis but more importantly

    p/e is really a dreadful indicator, and its a stretch to even call it that

    it’s better off being called what it is, a sentiment indicator, though I’m certainly not original in saying this, Phil Roth stated as much in an interview two decades ago, it rings more true now than it did then

    when you have to predict your indicator and then predict your indicators impact on the market its no wonder you are highly likely to fail in your forecast before you even state it.

  6. “…it’s better off being called what it is, a sentiment indicator…”

    That’s spot-_______-on!

    too bad, for them, that most (Di-)vestors, period, don’t ken that..

    but, I suppose, the Wool has to come from Somewhere, right?

    Winter is, afterall, coming up, no?

  7. rootless says:

    What should SPX prices be? Depends upon how much earnings fall during the coming slow down/recession.

    Why “should” SPX prices reflect the cyclical slow down/recession lows of the earnings? Why this normative? Why would this be the “fair price”? What is “fair” supposed to mean, anyway?

  8. rootless says:

    Or more generally, why “should” SPX prices be at x-multiple (e.g., 15) of next year’s (or so) earnings?

  9. Tom Bemis says:

    Are Dow earnings estimates overly optimistic?
    September 28, 2011, 11:02 AM

    Nicholas Colas, Chief Market Strategist at ConvergEx and colleagues Beth Reed and Sarah Millar have taken a closer look at earnings expectations for the Dow Industrials.

    While the Dow INDU is trading at only 10.3 times earnings estimates for the next year, and sports a 2.6% dividend yield, market caution appears justified.

    That’s because analysts “believe earnings will be 29% higher than previous cycle “normalized” results. For important companies in the Dow – IBM IBM, MCD MCD, and CAT CAT, for example, that number is +50%.”

    Colas and Co. conclude that those benchmarks are “aggressive” and that “it makes sense that markets are reluctant to pay up for stocks given all the other uncertainties burdening the capital markets.”