Normally when I comment on earnings expectations I focus on what is going on with the firms in the S&P 500, the topic of
my regular Earnings Trends feature. There, I use the 10 S&P GIC’s sectors.
The data in the graphs below is somewhat different, in that it uses the 16 Zacks sectors and is based on the entire universe. The concept of the revisions ratio is one that I spill considerable ink over in Earnings Trends. However, I found this data to be very interesting.
First let me explain what the revisions ratio is. Over a rolling four-week period, it measures the total number of earnings estimates for individual companies that were raised, and divides then by the number that were cut. The data below is for earnings estimates for the current fiscal year, which for the vast majority of companies is 2009. Thus, when looking at the history of revisions ratios, keep in mind that each week shares three of four weeks with the preceding week. When looking at the graphs remember that since they are ratios, they are by nature asymmetrical.
A reading of 0.5 on the downside equates to a reading of 2.0 on the upside, and a reading of 0.25 equates to a reading of 4.0 on the upside. Unless I wanted to chart the logs of the revisions ratios, I don’t see a way around that presentation problem. I split the data into two graphs since as it is, they start to look like spaghetti, but in your mind treat them as the same graph.
What is noteworthy is the steady increase we have seen in the proportion of estimate increases relative to estimate cuts. As the year began, things were very scary and analysts were falling all over themselves trying to see who could cut the earnings estimates for their companies the fastest. In every one of the sectors, cuts outnumbered increases by more than two to one, with the ironic exception being the Auto sector (the bar was already set pretty low by then for that group).
Since then, there has been a steady rise in the revisions ratios for just about every sector. However, for most sectors, the revisions ratio remains below 1.0, indicating that there are still more cuts than increases. This is very much consistent with the economic data that shows the rate of economic contraction slowing, but the overall direction of the economy still headed down.
I must say that the Retail and Consumer Discretionary sectors have fared much better than I would have expected given the overall economic environment. However, the rest of the areas that have gotten and stayed above 1.0 are relatively economically insensitive groups, like Medical and Consumer Staples.
The analysts following stocks in those sectors tend to be much more tightly grouped together than analysts who follow more cyclical sectors.
