Optimism over UK corporate earnings is evaporating

Forecasts for UK stockmarket earnings are down month on month led by downgrades in the oil & gas and life insurance sectors.

The consensus earnings forecast for the overall market fell by 1.5% for one year numbers and by 1.3% on a year two basis.

The most recent charts highlight the diverging expectations across the market. The fixed line telecoms and household goods sectors saw their earnings relative to the market upgraded to 4% on a one year basis, while personal goods at 3.9% and mining and banks, both at 2.9%, are also expected to deliver above market earnings.

These figures do hide the fact although the miners are still expected to outperform, the margin by which they are anticipated to do so has narrowed markedly over the past few months.

‘Since the March 9, 2009 lows, the year one and year two earnings forecasts for the mining sector have sky-rocketed,’ says Evolution Securities analyst Brennan Leong. ‘However, despite the level of their earnings estimates, the mining sector’s earnings optimism appears to have peaked in March 2010.’

‘In fact, both the year one and year two optimism has been falling since that date and the fall in optimism appears to be accelerating rather than slowing down.’

If optimism is waning around the mining sector it has positively collapsed on life insurers with consensus relative earnings expectations down 16.2% month on month. Much of this has been driven by the Prudential fiasco with its costly failed bid for AIA resulting in its relative earnings for the year being downgraded by a whopping 41%.

BP, on the back of its ongoing problems in the Gulf of Mexico, saw expectations around its relative earnings potential fall by a further 6.8% over one year and 5.4% on a two year basis, which helped drag down the overall expectations for the oil & gas sector by 2.5%.

Elsewhere, a number of other patterns have been emerging, Leong says. Earnings optimism around defensives has been diverging. Over the last five years the level of earnings optimism for consumer staples and consumer defensives have moved together, but in recent months the optimism around consumer staples has been markedly higher than for other defensives.

Optimism around general retailers remains fairly buoyant, despite the weakness in the economy, while industrials have seen a slight pick up after a weak start to the year.

All in all, however, the picture is fairly downbeat with overall earnings expectations down and even where their is consensus around sectors that will outperform, the margins of excess return are being squeezed down.