Despite EPS cuts, the market is projected to be up by the end of 2012

With the start of a new year this week, the market’s attention will not only focus on the start of the Q4 2011 earnings season on January 9 with Alcoa’s earnings release, but also projections for all of 2012.

Given the recent decline in estimated earnings for 2012 and the increase in the price of the index, do analysts expect the price of the S&P 500 to increase by the end of 2012?

Looking at projections from both industry analysts and strategists, the answer is yes. The bottoms-up target price based on estimates from industry analysts is 1453.46 (a 13.5% increase from yesterday’s close), while the top-down mean target price based on estimates from strategists is 1404.00 (a 9.6% increase from yesterday’s close).

Overall, analysts and corporations have significantly tempered expectations for earnings growth for Q4 2011 for the S&P 500.  Since the start of the quarter, the estimated earnings growth rate for the S&P 500 has dropped to 11.4% today from 18.8% on September 30. On a percentage basis, share-weighted earnings for the quarter have fallen by 6.2% during this time. The Materials (-26.8%) and Telecom Services (-22.9%) sectors have recorded the sharpest cuts to expected earnings.  In terms of EPS guidance, 81 companies have issued negative preannouncements for the current quarter.

The estimated earnings growth for the fourth quarter currently stands at 11.4%. If the final earnings growth rate is 11.4%, it will mark the ninth consecutive quarter of double-digit earnings growth for the index. The Financials sector is predicted to have the highest earnings growth (74%) and be the largest contributor to dollar-level earnings growth.  However, one company accounts for most of the growth in the Financials sector and more than half of the growth for the entire index: AIG.  If AIG is excluded from the index, the Q4 2011 earnings growth rate for the S&P 500 drops by more than 50%,
from 11.4% to 4.0%.  Comparisons to weak year-ago earnings are driving the unusually high dollar-level growth for AIG.

Traditionally the first Dow component to report earnings each quarter, Alcoa is scheduled to release earnings numbers on Monday (January 9). This will mark the unofficial start of the Q4 2011 earnings season. However, it will be a light week in terms of the overall number of companies reporting earnings. Only four other companies in the S&P 500 and one other Dow component (JPMorgan Chase) are scheduled to release results during the week. The peak weeks of the Q4 2011 earnings season will begin the week of January 17.

Read more about expectations for Q4 2011 in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.