AAII Survey: Are S&P 500 Earnings Estimates Too Optimistic?

posted by CHARLES ROTBLUT

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded in the latest AAII Sentiment Survey. Optimism increased 4.6 percentage points to 30.2%. Even with the increase, bullish sentiment remained below its historical average of 39% for the seventh consecutive week.

Neutral sentiment, expectations that stock prices will remain essentially flat over the next six months, rose 3.4 percentage points to 36.4%. This is only the third time since 2005 that neutral sentiment has been above 36%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, dropped 8.0 percentage points to 33.4%. Though this is a four-week low, bearish sentiment remained above its historical average of 30% for the 14th time in 15 weeks.

The improvement in bullish sentiment followed atypically low readings during the past two weeks and occurred as stock prices largely rebounded during the survey period. (The survey runs from Thursday 12:01 a.m. to Wednesday 11:59 p.m.) Even with the changes, optimism remained below average while pessimism remained above average. The market’s volatility, the uneven pace of the economic recovery and inflationary pressures are all dampening individual investors’ spirits.

This week’s neutral sentiment reading is unusually high relative to what we’ve been seeing over the past several years and suggests an elevated level of uncertainty. Neutral sentiment, however, remains well within its historical norms. Higher readings were registered throughout the 1987 – 2005 period. The record high is 62.0%, which was recorded on June 3, 1988.

This week’s special question asked AAII members whether they thought 2011 and 2012 earnings estimates for the S&P 500 are realistic, too conservative or too optimistic.

The majority of respondents thought the Thomson Reuters consensus forecasts for 16.9% profit growth this year and 13.4% growth next year were too high. Many said estimates were too optimistic, while others described them as being a bit high. Inflation and a lack of adequate job growth were common themes among skeptics. A minority of respondents described estimates as being realistic.

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Here is a sampling of the responses:

• “They are too optimistic, unless employment picks up.”
• “I think they are too optimistic. When do analysts ever suggest that everything is not rosy?”
• “Current and forecast profit levels can’t keep growing without real, sustainable business and economic growth.”
• “Too optimistic. Profits have already recovered from the Great Recession, and inflation constraints ought to hold back profits now.”
• “Realistic for this year, but possibly too optimistic for the following year.”

This week’s sentiment survey results:

• Bullish: 30.2%; up 4.6 percentage points
• Neutral: 36.4%; up 3.4 percentage points
• Bearish: 33.4%; down 8.0 percentage points

Historical Averages:

• Bullish: 39%
• Neutral: 31%
• Bearish: 30%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online.

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