Earnings Estimates for 2008 Appear Overly Optimistic

Although fourth quarter earnings reports just started to trickle in, consensus estimates call for 2007 S&P 500 profits to be essentially flat with 2006. Given the huge year-over-year declines in the financial sector, the largest piece of the index, this is not very surprising.

What is surprising is that analysts are projecting 2008 earnings to grow by more than 15%. We all know that analysts are rarely spot on with their forecasts, but the possibility of this number being accurate seems even less likely than normal. While the market’s P/E using the current forward estimate (less than 14) is not high by any means, bullish investors hoping for a solid market gain this year (at or above historical averages) likely need strong earnings growth to make the case.

Given the economic backdrop right now, a less impressive year in the market (more in line with last year) seems like a more reasonable expectation. As far as the economy goes, 2008 probably will be more of a “sorting out” year than a “snap back” one. As a result, I think the return of double digit earnings growth for the S&P 500 likely won’t return until 2009 at the earliest.