Analyst estimates is a critical piece that often is ignored by the retail investor. For the institutional investor it provides an important benchmark to measure both current market sentiment and investment appetite.
2004 has fundamentally been strong both in Europe and the US. European earning per share (EPS) growth has reached 27% while in the US market it has topped 19% on good sales momentum. Although these numbers are impressive, it is the past few months that are showing signs of deterioration.
Positive momentum on earnings estimates over the first half of 2004 offered considerable support to stock markets. But the situation appears to be reversing, particularly in the United States. Estimates for the S&P 500 and Nasdaq have been revised down 3.7% and 3.1%, respectively, over the past month and Europe (DJ Stoxx 600) is flat. If it were not for additional upward revisions to the energy, basic resources and chemicals sectors this deterioration would have been even more severe.
The early scorecard again gives small caps the lead. Not more so than the UK. The onslaught of corporate activity and rumours of takeovers has sparked the FTSE small cap index up almost 11% YTD this compares to the FTSE All-Share up about 7%. In terms of earnings revisions which provide a good indicator of sentiment the 1 month EPS revisions for both 2004 and 2005 are up 11% and 9% respectively. This compares to the rest of the UK market which is flat in 2004 and 2005.
A weakening dollar, a tight housing market and substantial deficits will surely start to affect the 2005 growth rates. Currently in the UK the EPS growth rate stands around 13% although significantly higher than the rest of Europe with stands at 11%, we believe this number will drop to high single digits.
With all this gloom mining, basic resources and oil sectors continue to dominant. Although we believe this trend is short term, there will be many opportunities generated in stock picking and news-flow. Outside factors will largely determine the outcome of the market for 2005. As such a more defensive allocation is the most appropriate strategy. Europe continues to look relatively cheap as well as provides a greater source of income (dividend yield 3.1%) than the US.
These views are independent of FactSet Inc and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.