By the Numbers

Will Lower Analysts' Estimates Lead to Upside Surprises?

Traders at the New York Stock Exchange.
Photo: Oliver Quillia for

The S&P 500 is expected to post earnings growth of 14.23 percent for the third quarter of 2011, according to S&P Capital IQ Consensus Earnings Report.

This will represent the eighth consecutive quarter of double-digit earnings per share gains. 

Although analysts have lowered Q3 earnings estimates by more than 2 percent to 14.23 percent from 16.94 percent on July 2011, nine out of ten sectors are expected to show gains.

Estimates indicate energy and material stocks have the highest EPS growth rate, up 52 percent and 31 percent from the same period in Q3 2010.

In terms of price-to-earnings valuations, four sectors have ratios below that of the S&P 500 index (14.5x): energy, technology, materials and industrials.

Investors using P/E multiples tend to look at this metric historically and in relation to the industry in order to determine if a stock may be undervalued. 

Weakness in the global economy, however, may impact upcoming earnings; therefore lowering the denominator in P/E multiples and sending the ratio higher. The assumption then would be that companies may not be undervalued at the current levels. 
On the other hand, if companies match or exceed their EPS growth rates, bringing up earnings multiples, then valuations may appear attractive to some investors. Both assumptions account for stock prices (the numerator in P/E ratios) at the current levels. 

Here is a look at some of the stocks in the S&P 500 with the highest and lowest pricet-to-earnings multiples.

Source: CNBC Analytics and Thomson Reuters

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