S&P 500 Earnings vs. Valuation Matrix

Even though we're in the midst of earnings season, most investors really have no idea where earnings are going to be in the future.  While the consensus forecast for 2009 is currently around $95, there probably isn't a person on the planet who thinks earnings will be anywhere near that high.  But how much further below $95 will earnings be, and what multiple do those earnings deserve?

With that in mind, we created a matrix to show where the S&P 500 would trade based on different combinations of earnings and multiples.  Boxes highlighted in red indicate levels within 5% of where the S&P 500 is currently trading.  As shown, if (and we realize there is really no chance of this happening) the consensus for 2009 EPS forecasts proves to be accurate, the S&P would currently be trading at about 10 times next year's earnings. 

So where are earnings likely to come in next year?  One of the more bearish forecasts making the rounds is that earnings for the S&P 500 will come in at $60 per share next year.  If that forecast proves to be accurate, that would bring the current multiple of the S&P 500 to about 15.5 times next year's earnings.  While a multiple of 15 is by no means extremely cheap on a historical basis, it is hardly expensive either.

click to enlarge

Comments

[Wefwef:]

$60 is not bearish, it's even optimistic. Very likely we will dip below $50 in 2009. The current S&P500 level at 940 is just mental, for a mental recession.

2008 Oct 29 02:37 PM

[gjvoor1:]

It would be nice to see this with the XLF and XLE carved out.

2008 Oct 29 02:38 PM

[Smarty_Pants:]

Given that GM is showing an EPS of -$103, that $95 figure will a tough sell.

2008 Oct 29 03:45 PM

[Moon Kil Woong:]

Hah, can we see a matrix going into negative numbers lol.

2008 Oct 29 11:42 PM

[MaverickBian:]

sony's profit fell by 90%...

Samsung's down by 44% so far...

Toshiba down by 99%...

Honda is warning its future profit...

Corning issued profit warning today...

Remember two facts:
1. Sales volume will be lower, which means unit cost will be much higher.
2. For every dollar lost in markdown, they almost all come from profit.
This kind of profit squeeze will cut business profit sharply during economic downturn.

My guess is 30% is pretty normal, 50% is doable, and in-red for some business.

2008 Oct 30 12:43 AM

[Mark Schoen...:]

DUDE- Standard & Poors projected 2009 earnings on the S&P500 at $48.52 on October 14, 2008. (They reduced 2009 earnings estimates EVERY month since March when they guessed earnings at $81.52).... If you read your history (Shiller is a good source), you would know that the S&P will drop its P/E during a credit and banking crisis to below 10. Ergo- from your chart, and history, we can expect the S&P to go to 450 or less at its trough.

2008 Oct 30 03:48 AM

[Mark Schoen...:]

Standard & Poor posted expected 2009 earnings on the S&P 500 as $48.52 on Oct. 14. (They have dropped earnings estimates every month since March when it was $81.52).... History tells us (read Shiller), that during a credit and banking crisis, the S&P 500 drops to P/Es below 10.... ERGO- your table, S&P and history tells us that the S&P 500 will go below 450 during this recession...

2008 Oct 30 03:59 AM

[dc1:]

One of the best charts I have seen here recently. Thank You. Keep up the good work.

2008 Oct 30 11:11 AM

[FWallace:]

Is it true that the S&P 500/SPY usually peaks around $150ish.....

and is it true the S&P 500/SPY usually bottome around $40-$60ish ???

Therefore we still have some downside ahead and will likely reach those lows sometime during '2009... before turning and start the recovery process (slow crawl) back up the the peaks, which usually takes 5 years....... then the wash cycle (another bubble of some kind) repeats itself ???

If history repeats!

2008 Oct 31 10:21 AM