The fourth quarter earnings reporting season is winding down with just six members of the Dow Jones Industrial Average members left to report. If you took a survey of traders right now, many would say that the earnings reports have been more than stellar and that the stocks have simply fallen victim to a “sell the news’’ phenomenon following a big rally. That’s why the Dow is at its lowest since November.
The real reason may be that CEOs have no idea what their earnings are going to be this year. Looking at the 24 members of the Dow that have reported quarterly earnings already, executives at half of those companies gave no clear forecast for 2010 or even the current quarter. Six members said 2010 or this quarter’s earnings would likely be below estimates and six, including American Express, Cisco and United Technologies, gave clear, forward-looking forecasts that were above analysts’ estimates. Coca-Cola and Disney report Tuesday.
But Wall Street analysts feel like they have a much clearer outlook on 2010 than the executives inside. For members of the S&P 500, they’re mouths are watering over the blowout earnings growth rate for the fourth quarter of more than 200 percent, compared to the dismal last quarter of 2008, according to Thomson Reuters. Excluding financials, the profit growth rate is still a respectable 16 percent, according to Thomson. Plus, companies reporting are topping their estimates for the last quarter at a 70-percent clip.
With not many clear forecasts from executives to work on, analysts are taking it upon themselves to extrapolate those better than expected fourth quarter results forward. Using the collective, bottoms-up stock price targets for companies in the S&P 500, Thomson Reuters calculates that the S&P 500 should rise to 1278, representing a 20 percent climb from here.
The disconnect may be that CEOs are staring at fears of global debt defaults, worries about expiring taxes, lackluster consumer lending and a potential dollar rebound denting their international profits. All things a sector-focused analyst may not take into account when diving into the books of his or her individual companies.
The question now for investors is: whom should you believe?
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