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Take a side!

09/08/2009

Economists and securities analysts usually work together well. Sometimes, when they do disagree, it is more apparent than real. The current disagreement is such a case. Economists remain glum, while analysts are giddy. Why? Because U.S. economists have a consensus forecast of a 2.4% growth rate next year, while analysts expect earnings of the S&P 500 to increase 25%. How can there be such a difference? Two reasons: First, the S&P contains the 500 largest U.S. companies, and they disproportionately benefit from international growth. Their growth is not limited to the U.S. Second, the earnings growth we have seen this year has been from cutting expenses, not revenue growth in a shrinking economy. That means their earnings per share are “spring-loaded” to jump as soon as revenue increases drop straight to the bottom.

So, who’s right? I hope they both are!

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