BREAKING NEWS
November 28, 2007
The Earnings Recession Has Arrived
“While the debate rages over whether the real economy is going into a recession, the reality is that the earnings recession has already arrived,” warns David Rosenberg, chief North American economist at Merrill Lynch.

With 90 per cent of the S&P 500 companies having reported, third-quarter earnings per share is down 8.5 per cent year-over-year, a huge swing from a positive 9.6 per cent in the second quarter and plus 11.6 per cent a year ago.

“This is also the weakest trend since the fourth quarter of 2001 when the economy was still struggling with the last leg of recession,” notes Mr Rosenberg. “What has been really shocking is what’s happened to reported earnings that, unlike the operating earnings number, includes charge-offs and write-downs. On this basis, the results are even more abysmal – earnings down 28 per cent year-on-year.”

But Mr Rosenberg says it is reported earnings that investors ultimately pay for. “So, this is not just about a pullback in risk appetite or a ‘panic’ – that’s the story in the money and credit markets. The story for equities is that the earnings cycle seems to have ended more abruptly than investors had anticipated.”

The current estimate for reported S&P 500 earnings per share for the third quarter of $15.29, gives a trailing price/earnings multiple of 23 – not the 14 on forward estimates that is bandied about. “The market may be less of a ‘bargain’ than many realise.”
Financial Times