Wall Street analysts lag badly as outlook worsens

By Tenzin Pema - Analysis

BANGALORE (Reuters) - Wall Street banks are behaving as if we are facing the mother of all recessions -- while strangely, many of their securities analysts seem to be living in a parallel universe.

The bankers have been in survival mode for some time, curbing lending and harboring cash while seeking money from the U.S. government's bailout fund.

Meanwhile, dozens of companies across a wide spectrum of Corporate America have been slashing jobs and capital spending, and warning that the outlook for sales and earnings is deteriorating, in some cases rapidly.

And yet the analysts expect aggregate earnings of companies in the Standard & Poor's 500 index to grow by 32.2 percent in the fourth quarter of this year, according to a report from Thomson Reuters Research released on Wednesday.

Within that figure are some startling expectations that defy the news flow coming out of key sectors.

For example, the analysts expect consumer discretionary companies -- basically companies such as luxury apparel retailers who sell items that aren't necessities of life -- to post an earnings decline of just 1 percent in the final quarter.

This is in the face of warnings from the retail industry of the worst holiday season in years and consumer confidence that has plunged to a record low.

The analysts have a similar rose-colored view of earnings in 2009. You think the downturn is going to be long and hard? Don't believe a word of it. The research teams see earnings growth for the S&P 500 at 15.7 percent next year, with consumer discretionary earnings surging 32 percent, and financials climbing 149 percent, which includes a big assumption that the banks will be well on the road to recovery from the credit crisis.

"It's hard to believe that they're going to continue with that kind of estimate," said Lawrence White, professor of economics at New York University's Stern School of Business.

"My guess is that come December for sure we would see much smaller increases being forecast and maybe even decreases being forecast."

The analysts do, of course, eventually catch up. But they lag so badly that the aggregate estimate figures are of little use to those wanting to know where earnings are heading.

For example, expectations for earnings growth for consumer discretionary stocks in the fourth quarter plummeted from 45 percent on April 1 to 25 percent on July 1 to 12 percent on October 1, before the latest forecast for a decline of 1 percent.

Similarly, expected earnings growth for the aggregate of S&P 500 companies in the fourth quarter has dropped from 64 percent on April 1 to 59.3 percent on July 1 to 46.7 percent on October 1 and now to 32.2 percent.

This is particularly important for investors trying to decide when the market has fallen so far that it has hit bargain-basement levels.

For example, the Thomson Reuters Research data shows that S&P 500 companies are expected to produce a collective $94.81 of earnings per share in 2009, which puts the market at a current price-to-earnings ratio of 9.91 at Tuesday's close. That makes stocks look about 35 percent cheaper than their historical average of 15 times forecast earnings.