dshort.com - Earnings Estimates and Consumer Behavior: Looking Grim

Market valuation is a regular focus at dshort.com, as in my monthly report Is the Stock Market Cheap? My source for the most recent As-Reported earnings is the Standard & Poor's Excel file maintained by Senior Analyst Howard Silverblatt. The spreadsheet is available on the Standard & Poor's website (free registration required). The numbers I want are in column D on the ESTIMATES&PEs tab.

During earnings season the numbers for the most recent completed quarter are adjusted several times a month, and *usually* there are as-reported earnings estimates for the next several quarters. But in the latest update (August 4th) the as-reported estimates have been replaced with the phrase Under Review. The tables below compare the current data with the spreadsheet numbers I posted a few days ago here.

The lack of sales growth continues to be the issue, with more data showing that consumers are becoming more nervous and pulling back. As Reported earnings have come in much stronger than estimated and have lacked major charges; the estimates are currently under review.

I look to sales as a future indicator. On this basis, earnings are running ahead of Q1 2010, but sales are flat, and that's the problem. It's great that companies have improving earnings, but those improvements are due to high margins, which were the product of cost cuts — specifically job reductions, the very thing that we need to improve now. Until companies and consumers start to spend more, the job front will not get better, but they won't spend more until they believe things are getting better. The stimulus programs were supposed to jump start the economy and break the downward cycle by convincing both groups that better times were here. But so far we're not seeing the sales or the jobs; but earnings are good, at least for now.

I assume that Silverblatt's evidence for weak sales comes from Q2 company reports and thus is a rear-view reading. Unfortunately, a future indicator from the Consumer Metrics Institute paints an even grimmer picture. Here is the snapshot of the Weighted Composite and Growth Indexes that I updated earlier today.

These indexes indicate that Consumer behavior during the first half of 2010 is weaker than last year, and the first few weeks of Q3 have been a veritable cliff dive.

What does this mean going forward? Silverblatt notes that Q2 as-reported earnings have come in much stronger than estimated. But, absent the consumer, the next few quarters could be ugly, and year-over-year comparisons may be disastrous.