Posted by: Ben Steverman on November 19, 2007
With the Dow Jones Industrial Average again below 13,000, pundits are trotting out a lot of excuses for the stock markets’ poor performance recently. Certainly fears over subprime losses are playing a role, but that doesn’t quite explain why the tech-heavy Nasdaq is off more than 9% this month.
Not to oversimplify, but I place the vast majority of the blame on one factor: earnings. There are a few different ways to calculate corporate profit levels. But, with third quarter earnings season now basically over, Reuters Estimates says it expects earnings for the S&P 500 fell 2.5% from a year ago.
Analysts routinely underestimate earnings growth. This is the first quarter in a long while that they overdid their estimates, predicting 2.5% growth when the third quarter started.
According to Reuters, analysts are now projecting 5.9% earnings growth in the fourth quarter. But what if they’re wrong again? Wall Street seems to be betting profits, arguably the most reliable long-run determinant of stock prices, have even further to fall.