Assessing 2008 and 2009 earnings
We update our regional earnings analysis given (a) rising cost
pressures, (b) cyclical macro headwinds, and (c) our expectation that
markets will start to focus on 2009 earnings during coming months.
Moderate upside, larger downside risk
The principal equity market implication is that markets have moderate
upside potential under a relatively benign macro environment but
larger downside risk if conditions worsen. Valuations are unlikely to
expand in the context of pedestrian EPS growth, but could compress if
growth estimates fall as we expect or macro stress increases. We retain
a guarded investment stance.
Consensus estimates are too optimistic
We continue to expect 8% regional EPS growth in 2008 vs. consensus
of 10%, which has dropped nearly 4pp since the start of the year. We
expect 10% growth in 2009, vs. 14% for consensus.
Downside risk for most sectors
High profit margin estimates are a key risk for 2009 earnings: the
consensus expects margins to rise for 16 of 19 regional sectors, many
to levels at the high end of multi-year ranges.