Compare World Industry Service (WIS) "Top-Down" Forecasts of Sector-Profit Growth with "Bottom-Up" First Call Consensus Analysts’ Estimates 

We see recovery unfolding during 2010–11 with Asia and the United States taking the global lead into expansion, while Europe lags behind. While the initial bounce-back is likely to be sharp—as it comes on the heels of a very steep recession—the pace of recovery will nonetheless be more muted in the developed world than in the previous business cycles.

To illustrate, on January 28, 2010, we compiled all the financial analysts' forecasts for profits growth for 2,214 companies in the United States and 1,030 companies in the EMU region, as published by First Call.

Overall, IHS Global Insight and First Call Consensus Analysts' forecast for sales is much weaker than for earnings. Given high unemployment and dramatic cost cutting, companies are running very lean while profit margins are surging.

An average (consensus) of forecasts shows that the profits growth forecasts for 2010 from the bottom-up expectations are more than 1,000 basis points higher in total for the United States when compared with similar top-down forecasts from IHS Global Insight. In the EMU region, the gap is even larger than seen in the United States.

The role of economic sectors in generating or participating in the recovery will be different than the historical tendency. Because of this, the bottom-up forecasts from financial analysts for profits earned by individual companies are likely to prove too optimistic in their growth expectations.

We find that the bottom-up forecasts look much too optimistic for some cyclical sectors such as consumer discretionary and financials. High unemployment levels and the deleveraging U.S. consumer will restrain consumer spending. With profits expected to climb 30.22% in 2010, the financial sector is the second-fastest-growing sector. While the largest banks have fared relatively well and repaid government bailout funds, commercial banks continue to struggle under the strains of a weak real estate market, a deleveraging consumer, and new financial regulation.

By contrast, the consensus expectation for earnings growth seems too low in the telecom and utilities sectors when compared with the IHS Global Insight forecast.

Among sectors, analysts favor sectors exposed to expanding emerging markets such as energy and materials. Both of those sectors posted deep declines in 2009 and are expected to rebound sharply in 2010, growing 29.6% and 32.3% correspondingly. While we agree with this general theme, we think that analysts' expectations are much too high and forecast almost half of their sectors' growth.

Thanks to global economic rebound and improved capital spending, technology and industrial sectors remain favorites among analysts as well. Their profits are expected to climb 23.6% and 17.5% in 2010, according to consensus estimates, but only 15.3% and 6.0% according to IHS Global Insight forecasts. In the EMU, expectations for the information technology sector are very robust. The sector will lead EMU recovery with projected profit growth of almost 35%.

Click to see the WIS Top-Down Sector Profits Growth Forecasts vs. Bottom-Up First Call Consensus Analysts’ Estimates:

WIS Top-Down Sector Profits Growth Forecasts vs. Bottom-Up First Call Consensus Analysts’ Estimates