Analysts say yes, investors say no: Earnings reports will show who’s right

For months, analysts who write reports praising or panning stocks have been saying they were cheap. Investors were unconvinced, buying one day, selling the next.

Stock prices compared to expected profits are now nearly as low as they were in March 2009, a 12-year nadir that marked the beginning of one of the greatest bull markets in history. Have investors sold too much, as they did back then?

“I’d be buying the market,’’ says Citigroup’s chief US strategist, Tobias Levkovitch, who warned that prices were too high in the spring. Says Harris Private Bank’s Jack Ablin, who sold $6 billion or so of stock in August, “We’re sharpening our pencils to figure out when to get back in.’’

Who’s right may turn on earnings, or rather, analysts’ estimates of how fast they will grow.

Recently, they have been cutting them for companies in the S&P 500 as fears of another recession spread. But they’re still predicting they will earn 13 percent more earnings in the three months through September than they did in the same period a year earlier, according to FactSet. That would mark the eighth straight quarter of double-digit gains. For the full year, analysts say earnings will set a record.

“You can toss [those estimates] in the garbage,’’ says Peter Boockvar, equity strategist at Miller Tabak & Co. “Will Greece go bankrupt? What will be the extent of the global economic slowdown? I can’t get that out of an analyst report.’’

If history is any guide, more cuts are coming from analysts. One ominous sign: Those who changed their estimates this month chose to cut them more than six out 10 times, according to Citigroup. Early last month, raised estimates outnumbered lowered ones by nearly the same ratio.

Analysts are easy to bash. They tend to be far too optimistic, cheering on stocks long after they have headed down. Now they want us to believe companies can continue making record profits amid falling housing prices, tightfisted consumers, sputtering US growth, and a European debt crisis.

But it’s been the naysayers, the investors, and not the optimistic analysts, who have mostly been wrong lately. At the start of the bull market, investors worried that companies could not generate enough profits. Companies cut expenses to the bone, and profits soared. Investors worried companies wouldn’t be able to sell more, and that profits were bound to fall. Companies defied expectations again with higher revenue, much of it overseas.

At Friday’s close, the S&P 500 was trading at 10.6 times analyst estimates for earnings over the next 12 months. That’s low for this so-called earnings multiple, which could mean stocks are cheap. When stocks bottomed on March 9, 2009, they were trading at 10.4 times estimated earnings. The 10-year average is 15. Of course, the multiple might not look so appetizing if companies’ results show the estimates were too high.

Bernard Condon writes for the Associated Press.