S&P Earnings - 1st Favorable Revision for 2009

Below is an interesting chart I put together tracking consensus earnings forecasts for the S&P 500 over the prior year (when S&P actually starting tracking 2009 estimates). As evident in the chart, the sell-side completely overestimated the earnings power of the S&P last year when a bottoms-up forecast of the individual components resulted in a $110 per share estimate. Each subsequent week resulted in a downward revision to the forecast, which appears to have bottomed on May 19th, when S&P reported a mean estimate of $54.20/share.

Perhaps the most bullish takeaway, and one to keep track of over the coming weeks, is that consensus estimates have started to increase. As of June 16th, the mean forecast was $55.80/share, valuing the S&P at a reasonably comfortable 16x earnings. While certainly not cheap, an important milestone may have been reached with the street’s bearishness being fully reflected in the earnings power of the S&P. Historically, favorable earnings revisions have been a harbinger of future stock market gains so I will continue to follow closely.

As someone who is trying to identify fundamental data points to support the rally over the prior 3 months, this chart provides reasonable confirmation that the bulls may be justified in their early enthusiasm. With that said, 2010 consensus earnings growth of 33.1% ($74.32/share) bake in a sizable rebound in the economy. In my opinion, little evidence has emerged to support this bullish scenario, though I would love to be disproved and admittedly the industries I cover (housing and media) have fundamental secular challenges that may unfairly taint my view of the overall economy. As companies begin to report 2Q earnings, investors will be able to judge whether the supposed "green shoots" are actually finding their way from politicians' lips to corporate earnings.