Analysts still expect earnings per share to quickly bounce back

National Bank Financial cautions investors against assuming that the current market is a bargain.

In a research note, NBF says that equity markets have shrugged off the disappointing economic news from last week (GDP and employment), “to instead put their faith in aggressive monetary stimulus and attractive valuation”.

It notes that the S&P 500 is currently trading at less than 14 times forward earnings. “This is the lowest forward PE ratio since 1995 and compares favourably with the lofty level of 21 that prevailed at the onset of the previous recession,” it observes.

“This being said, it would be a mistake to conclude that the market is overly cheap. Sure, analysts have lowered their earnings expectations in recent weeks, but they did so mostly for current quarters,” NBF adds. The bottom-up consensus of Wall Street equity analysts still expects earnings per share to quickly bounce back near the level they had forecast three months ago by the fourth quarter of 2008, it reports.

“With the baseline of 2007 earnings now lower, this translates [to] earnings growth of no less than 17.5% for calendar year 2008. Considering the ongoing U.S. economic slowdown, many companies will be forced to warn the market that they will not be able to meet such lofty expectations,” NBF predicts.