The last few years have been witness to the same old story in the markets—analysts start the fiscal years with high hopes that the expected turnaround in corporate earnings is round the corner and they pencil in high growth for the year. As the year progresses, they cut their earnings estimates, while their hopes shift to the second half. In the second half, they say that while growth in the current year has proved elusive, next year will bring the promised spurt.
The chart, taken from a Bank of America Merrill Lynch (BofA ML) research report, shows the steady downward revisions in aggregate earnings per share estimates of the companies that make up the S&P BSE Sensex, for FY16, FY17, FY18 and FY19.
Is the consensus too optimistic for FY18 earnings as well? Says the BofA ML report, “On the back of a favourable base and modest recovery in macro, we expect aggregate profit growth for the Sensex to recover in FY18/19 to 12%/14% (Vs. 0-5% over FY15-17). However, consensus forecasts of 16%/20% growth for FY18/19 seem too optimistic; implying further earnings cuts.”
“This coupled with high valuations suggests the current risk-reward is unfavourable,” adds the report.