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What's the Best Economic Indicator?
The Best Economic Indicator you won't find on charts - Revisions to analyst earnings projections (data out monthly).
The 12-month forward S&P 500 earnings estimates, for example, peaked at $103.61 per share right when the market peaked in October 2007. It bottomed, believe it or not, in March 2009 (right at the market lows), at $60.08.
The consensus analyst earnings estimates on a 12-month forward basis peaked this year in April — again, right when the S&P 500 did — at $94.79. It has since declined for five months in a row and so far in September is down 1.3%, to $86.74.
From the April peak, bottom-up earnings estimates have come down 8.5%. We have data back to the mid-1980s and while earnings downgrades can happen in the context of a bull market, when they are down as much 8.5% in an eight-month span it is always in the context of an overall bear market. Let's respect what the historical record tells us on this score; that we can go down much farther before finding the real bottom.
In addition to our income focus, a highly volatile market backdrop also warrants hedge fund ("long-short") strategies that truly hedge.
That's right — [we] still think, even after this wimpy September rally, that when this prolonged trading range breaks, it will break to the downside. If we are wrong, it will require, a break of the April highs in both the industrials and the transports and on convincingly strong volume.
This means that the time to start turning optimistic is when these earnings estimates bottom out (i.e., the downgrading process comes to an end). Now at the profit cycle peaks, the analysts are typically about 20% too bullish on their earnings estimates for the coming 12 months, which would then mean a trough somewhere around $75 EPS this time around — if past is prescient.
So this is a level I would be looking at before sounding the all clear that a lot of the "double dip" news is priced in ($75 would be a 4% earnings haircut from where we are now on a 12-month trailing basis for operating earnings).
The consensus, meanwhile, is still at +11% in terms of profit growth expectations for the coming year, which is unlikely to occur if nominal GDP growth is flat-ish, as I expect. But at the peak, the consensus was looking at +43% EPS growth for the next 12 months, so at least we are well on our way in this process of eradicating the excess optimism in consensus profit projections.
In any event, there is no alarm bell that rings at the lows or the highs but this seems like a metric we can fall back on at some point to turn more bullish.
The 12-month forward S&P 500 earnings estimates, for example, peaked at $103.61 per share right when the market peaked in October 2007. It bottomed, believe it or not, in March 2009 (right at the market lows), at $60.08.
The consensus analyst earnings estimates on a 12-month forward basis peaked this year in April — again, right when the S&P 500 did — at $94.79. It has since declined for five months in a row and so far in September is down 1.3%, to $86.74.
From the April peak, bottom-up earnings estimates have come down 8.5%. We have data back to the mid-1980s and while earnings downgrades can happen in the context of a bull market, when they are down as much 8.5% in an eight-month span it is always in the context of an overall bear market. Let's respect what the historical record tells us on this score; that we can go down much farther before finding the real bottom.
In addition to our income focus, a highly volatile market backdrop also warrants hedge fund ("long-short") strategies that truly hedge.
That's right — [we] still think, even after this wimpy September rally, that when this prolonged trading range breaks, it will break to the downside. If we are wrong, it will require, a break of the April highs in both the industrials and the transports and on convincingly strong volume.
This means that the time to start turning optimistic is when these earnings estimates bottom out (i.e., the downgrading process comes to an end). Now at the profit cycle peaks, the analysts are typically about 20% too bullish on their earnings estimates for the coming 12 months, which would then mean a trough somewhere around $75 EPS this time around — if past is prescient.
So this is a level I would be looking at before sounding the all clear that a lot of the "double dip" news is priced in ($75 would be a 4% earnings haircut from where we are now on a 12-month trailing basis for operating earnings).
The consensus, meanwhile, is still at +11% in terms of profit growth expectations for the coming year, which is unlikely to occur if nominal GDP growth is flat-ish, as I expect. But at the peak, the consensus was looking at +43% EPS growth for the next 12 months, so at least we are well on our way in this process of eradicating the excess optimism in consensus profit projections.
In any event, there is no alarm bell that rings at the lows or the highs but this seems like a metric we can fall back on at some point to turn more bullish.
From David Rosenberg, Chief Economist & Strategist, Gluskin Sheff
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