Taking a big picture view of the current earnings environment shows just how much “better than expected” the current earnings have been. Despite having predicted the current rally, I am highly skeptical of the quality of the rally. The following graph shows the timeline of analyst’s Q2 estimate changes. As you can see, the estimates have been slashed by nearly 50%. Could the analysts have gotten it more wrong? And why is anyone now surprised that they were so far off again? All of this has to make you wonder just how important “better than expected” really is. Reader Robert in Chicago elaborates:
These numbers are for S&P 500 “operating earnings,” which exclude the allegedly one-time items; GAAP earnings, which can’t be gamed as much, are literally half as much this quarter, the largest divergence ever apart from 4Q08 — 44% below 2Q08 and 68% below 2Q07.