Fallout: The Financial Crisis

4th-quarter estimates a bit too positive

Ashley Milne-Tyte Oct 31, 2008
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Fallout: The Financial Crisis

4th-quarter estimates a bit too positive

Ashley Milne-Tyte Oct 31, 2008
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TEXT OF STORY

Steve Chiotakis: Securities analysts expect across-the-board earnings of companies in the S&P 500 to grow — grow, you heard — by more than 30 percent in the fourth quarter. Sound a little odd, given today’s economy? Well, we asked Ashley Milne-Tyte to check it out.


Ashley Milne-Tyte: Analysts have a reputation for wearing rose-colored glasses. They’re much more likely to rate a stock a buy than a sell, even in bad times.

John Butters of Thomson Reuters says there’s a good reason why these fourth-quarter estimates seem so strangely positive:

John Butters: If you look at the fourth quarter of ’07, particularly in the financial sector, we really start to see the earnings weakness due to write-downs for the credit problems.

The banks’ problems dragged down average earnings in the S&P 500 last year. This year, with those write-downs out of the way, analysts expect the banks to grow quickly. And once again, Butters says, that’s skewing the average.

Butters: If you remove the financial sector from the index, that 31.7 percent growth rate drops down to 1.2 percent.

Don’t bank on that 1.2 percent though, he says. Analysts revise their expectations all the time. And recently, they’ve been cutting estimates across a whole range of sectors.

In New York, I’m Ashley Milne-Tyte for Marketplace.

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