Time to Lower Earnings Estimates?

Earnings: it's early, but analysts may have to start lowering their estimates.


So far, 18 percent of the S&P 500 has reported earnings, according to Standard and Poor's. This is still a small data base, but of that group, only 55 percent are beating expectations.

That is well below the average of the last four quarters (69 percent), and still well below the 10 year average (62 percent).

We have been in a period of relatively strong earnings growth in the past year or so, so it's not surprising there is some reversion to the mean.

Regardless: if we end the quarter with a mere 55 percent of companies beating expectations, it would be the lowest percentage that beat in about 10 years.

Speaking of lowering earnings estimates, banks aren't a bad place to start. Several regional banks reported today: Suntrust, Fifth Third and Comerica.

Bottom line: there is very modest loan growth (up 2 to 3 percent), and with rates this low, net interest margins are pathetic: a 15 year mortgage at 3.60 percent? Who wants that loan on their books?

Another problem: we've already had a rally in regional banks; many of them have rallied 30 percent off their lows in December. Look at STI: $16 in December, $21 today.

As a result, most regional banks are now trading at a much higher P/E multiple (13-14 times forward earnings) than the big money center banks (7-8 times forward earnings for companies like Citi and JPMorgan ).

So to get more "oomph" out of these — to get earnings really moving up —you have to believe that there will be significant upside to the U.S. economy.

The problem: if we ever get a big turn in the economy, it’s the money center banks with the much lower P/E ratios that are really going to kick butt.

Don't get me wrong: some traders will hide in regional banks, even with just modest growth in the U.S. economy: domestic data is not bad, and they don't have international exposure. There's nothing wrong, but muddling through is hardly exciting.

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