The right time to buy: Dynamic measures

The graph below tells you everything you need to know about analysts' estimates – it looks at reported earnings growth forecasts (just the forecasts) and shows that analysts are slashing their estimates of future earnings at a truly alarming rate.

According to Mr Lapthorne, analysts are in a panic – the figures show that over 7 per cent taken was off total global earnings estimates in the four weeks of March alone.

What's likely to make matters worse, according to Mr Lapthorne, is that 2009 figures are coming down from very high levels in 2008 – despite the markets' collapse, company earnings and sales were actually very high. "According to the figures published so far, ex-financial sales growth rose by an incredible 9.4 per cent in North America and by 6.4 per cent excluding the energy sectors," he says. "In Europe, sales rose by 8.2 per cent (6.5 per cent ex energy). During the early 1990s recession, sales growth was typically between 1.5 and 2.5 per cent. These buoyant sales were reflected in abnormally high operating margins. Margins that breached their previous historical highs a couple of years ago barely retraced in 2008. In North America and Europe (albeit on a sample universe), operating margins were down just 5 per cent from their peak in 2006." Mr Lapthorne's bottom line is that: "We are still very much at the beginning of a major corporate profit slowdown.”

Mr Smithers is also deeply sceptical about future profits growth, or should we say decline – his core view is that profits growth can only ever be a function of economic growth and that, as the global economy keeps on falling, profits will continue to decline. He's particularly sceptical of forecasts of a return to profits growth in 2010. "It is generally assumed that economic recovery will be accompanied by rising profits," says Mr Smithers in his most recent World Review. "This is only likely if growth exceeds its trend rate, and the OECD is currently forecasting that it will be well below this level in 2010."

The table below is perhaps the most damning bit of evidence in the bears' armoury – it suggests that when a recession or depression strikes, operating margins and thus profits tumble heavily. In the table, Mr Smithers looked at previous economic downturns and then examined what happened with operating margins. The 6.67 per cent decline in US operating margins is only around the average for a downturn with many showing profits declines of at twice this level.

Mr Smithers also echoes the fear of many value-based analysts that earnings are falling fast because profits in recent levels have been artificially inflated – with extensive one-offs used to flatter corporate earnings. He also notes that many large companies' financial positions entering the recession were far worse than previously thought. "The extent to which companies are overleveraged is still under-appreciated. We think that banks are still woefully undercapitalised," he says.

The bottom line? "Margins are thus most likely to fall when, as today, they are above or near average and have recently declined," says Mr Smithers. "Unless, therefore, either US GDP growth in 2010 amounts to 2 per cent or more, or there is a major further fall in the dollar, profits as published both by companies and in the national accounts are likely to be lower in 2010 than in 2009."

There is one small ray of light, though – this quarter is likely to show some decline in the rate of profit declines. According to data from Bloomberg, 66 per cent of S&P 500 companies that have announced results so far since the beginning of April have beaten Wall Street's projections.

■ Prognosis: Poor but not desperate – profits are still falling fast although this current quarter's figures are likely to show a slowdown in the rate of decline

Extent and duration of previous margin contractions