Equity rally doesn't reflect earnings optimism

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Posted on Wednesday, September 22, 2010 at 10:11AM by

Simon Ward |

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US stocks have rallied recently despite equity analysts making more downgrades to 12-month-forward company earnings estimates than upgrades. The "revisions ratio" (i.e. the difference between the numbers of upgrades and downgrades in a particular period, divided by the total number of earnings estimates) correlates with business surveys; current weakness suggests that the ISM manufacturing new orders index will fall further to around the break-even 50 level, while remaining above the 45 threshold consistent with a "double dip" – see chart.

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