 |
|||||
|
|||||
 |
|
|
|||||
|
|||||
|
|
SP500 Projected Future Earnings /
April 14/07 - Market Earnings are the lifeblood of the markets, if there was never any possibility of profits nobody in their sane state of mind would invest in stocks. Thankfully, the earnings of the S&P 500 are positive and lately have been positive in a big way. As go earnings so normally goes the market and earning estimates are the biggest big business in the investment industry. Why then are earnings difficult to predict even with good knowledge of a company or industry?
Earnings Projections are just as difficult to forecast as the markets due to the number of variables in the economy. For stock valuation, company specific earnings are in many cases he basis of buying the stock. This is apparent on earnings day, as any deviations from the forecast are meet with extreme volatility. Earnings forecast keep broker analyst busy writing reports for current and potential clients, this helps to sell as the firm appears to be providing investors something tangible of value that the client would not have the time to research. It may produce a tangible report but the variables used in the report are far from being tangible to forecast - it is not like measuring how high a tree will grow using measurements such as soil condition, moisture and hours of sunshine among other factors that can be directly measured.
The truth be told as the economy changes so do the fortunes of any individual company on average. This means that earnings rise and fall along with the variables that impact the economy and the costs of doing business. Some of those costs are the cost of borrowing (such as outstanding debt that most companies have) and the ability to price products based on costs. This means that as these factors change so must earnings estimates. Normally estimates are revised when earnings are released as investors have an appetite for the unknown.
Our model of SP500 Earnings Forecast is based on macro indicators mentioned above and on various estimates of potential risks (volatility of earnings). As in the Black Scholes model of option pricing we believe that the best estimates are made with the most current information. At this point we do not attempt to focus on individual companies but the market as a whole. The free cash flow model is the preferred method of corporate evaluation but that is more difficult to calculate (with fewer errors) so the earnings estimate may be the next best thing. Further earnings come out quarterly and give investors something to bite into until the next quarter.