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Earnings Season Exposed: Analysts Cutting 2011 EPS

With most of the second quarter results in for the S&P 500, companies and investors have declared this earnings season a success with Thomson Reuters figures showing that three-fourths of the member companies beat analysts’ estimates. Don’t believe the hype.

While analysts have ratcheted up their 2010 estimates following all these positive surprises, a look deeper into their glowing reports finds that they are actually bringing down their 2011 numbers. The consensus S&P 500 EPS estimate for 2011 is actually down 80 cents to $95.14 from its peak in June, according to Credit Suisse.

“We have a hard time believing an improvement in ‘fundamentals’ has been a big driver of higher stock prices in recent weeks,” wrote Doug Cliggott, the equity strategist for Credit Suisse who crunched the data. “ We maintain a defensive bias to our recommended portfolio and continue to hunt for US equities that offer a blend of good yield and good growth.”

This may explain the lackluster follow-through in the stock market this week even as macroeconomic conditions eased in Europe. The market, being the predictive mechanism that it is, has already moved on to 2011 and does not like what it sees.

Stocks added to their losses after Goldman Sachs cut its 2011 GDP growth estimate to 1.9 percent from 2.5 percent. The firm’s economist, Jan Hatzius, cited the disappointing economic data as of late and the likely expiration of the Bush tax cuts.

Cliggott is recommending health care and telecom stocks as refuge amid the weakening earnings outlook.

“The rate of medium-term earnings growth implied in current stock prices is now 9% for the health care sector, well below the 13% growth rate for the S&P 500 as a whole,” wrote the stellar strategist, who was widely followed for his prescient calls in the late 1990s at JPMorgan. “Current yields on both AT&T Inc. and Verizon Communications Inc are now right around 7%.”

With reporting by Juan Aruego

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