S&P 500: There Is No P/E (Part I)

Co-Written by Patrick Kirts

Standard and Poor’s is predicting that, for the first time, the S&P 500 will have a negative twelve-month trailing price-to-earnings ratio in the third quarter of 2009. The following chart compares five sets of data for the S&P 500 and its financial sector constituents, with actual earnings for 2007-8 and estimated earnings for 2009-10, in both as reported diluted earnings per share (with top-down estimates) and operating earnings per share (with bottom-up estimates).

While financials had negative earnings for over a year, the index as a whole did not really start to sink until the fourth quarter of 2008. Losses were sustained in several sectors that quarter, but none so heavy as in the financial sector, with losses of ($23.91) for the quarter—almost matching the diluted EPS of the entire index—and ($37.95) for the year, almost three times the losses per share of the next most damaged sector, discretionary consumer goods. We also note that, starting in the third quarter, but most pronounced in the fourth, operating earnings significantly diverge from reported earnings, reflecting the fact that many of the losses were due to a ballooning number of supposedly one-time charges, impairments, and write-downs. In addition, we see that the losses of the fourth quarter were drastic enough that the trailing 12-month diluted EPS does something rare in 2009: assuming the current index price, it drops to $0.44 in Q2, and then becomes negative in Q3, ($1.83), before a rally in Q4. We will return to these estimates, but first let’s look at another chart that more fully illustrates this price-to-earnings anomaly.

The left axis denominates the 12-month trailing as reported diluted earnings per share. The right provides a unit-neutral comparison of the as reported diluted price-to-earnings ratio and S&P 500 price. We see clearly the P/E disturbance caused by the effect of the fourth quarter 2008 losses on the trailing year. As earnings fall toward zero, the P/E first shoots up to 1944 (after slowly rising during 2009), and then just as dramatically falls to (468), a historic event.

Turning to Standard and Poor’s earnings estimates, we see that they expect corporate earnings to continue with a slow climb throughout 2009, leading to a significant rebound in the trailing P/E in the fourth quarter, once 2008 losses are completely purged from the system. A miraculous turnaround is not expected, and 2010 is poised to see some turbulence, with a retrenchment in the P/E and fluctuating earnings. A sober picture, to be sure, but nevertheless perhaps too optimistic.

The scenario presented here for 2009-10 seems to assume that, once the 2008 losses are absorbed, a sort of muted business-as-usual will take over. In Part II of S+P 500: There is NO P/E! we will analyze the validity of Standard and Poor’s outlook.

Disclosure: No Positions.

Comments

[mrmillergd:]

Love that V-shape recovery!!! Buy Buy Buy!

Wait...tell me again what's driving profits higher? Because equity analysts are never too bullish on the names they cover, right?

Increased revenue? No, "flat is the new up"

Decreased expenses? No, we've already fired everyone we can.

Never mind...

S&P 500 hits 450 before this is over.

Apr 22 07:47 AM

[Lee Eugene ...:]

I just wrote some ramblings on my blog, leemunson.net about why I hate V's, so your comments are auspicious. While I am not sure about S+P 450, V's are not good and don't really exist in nature. And yes, the brilliant analysts on Wall Street really do think a decrease in the fall is a good sign. Keep being bearish!!!!


On Apr 22 07:47 AM mrmillergd wrote:

> Love that V-shape recovery!!! Buy Buy Buy!
>
> Wait...tell me again what's driving profits higher? Because equity
> analysts are never too bullish on the names they cover, right?<br/>
>
> Increased revenue? No, "flat is the new up"
>
> Decreased expenses? No, we've already fired everyone we can.
>
> Never mind...
>
> S&amp;P 500 hits 450 before this is over.

Apr 22 07:54 AM

[paulsjj:]

V's, charts, number crunching, etc...waste of time. The S&P500 "P" is at about 58 compared to 1 "E". by reported earnings in Barron's. I am not paying $58 for $1.00 of earnings. The SP500 is still overpriced compared to shrinking earnings. No bull until the price aligns realistically with earnings.

Apr 22 08:49 AM

[doubleguns:]

Any P without an E is a foolish bet.

Apr 22 09:32 AM

[Vox Rationalis:]

There has never before been data that so clearly shows why 12-month P/E is of very limited usefulness in stock and market analysis.

Apr 22 09:49 AM

[Nick Gogerty:]

OK, the earnings won't be there, but can they make it up on volume like the .coms in 2000? ;)

Apr 22 10:43 AM

[markincorsi...:]

Goldilocks was a fairy tale character...never really existed. Except in the brainwashed masses. That is why the 3 bears are now eating the porridge.


On Apr 22 11:53 AM Cetin Hakimoglu wrote:

> It may seem that way, but the huge funds run by smart people are
> pricing in a return of the Goldilocks economy. So far, economic data
> is encouraging ,and there's no hyperinflation or deflation. Just
> a great moderation.

Apr 22 12:18 PM

[jambo:]

Clarity and verity all wrapped in short and VERY clever response, well done.


On Apr 22 12:18 PM markincorsicana wrote:

> Goldilocks was a fairy tale character...never really existed. Except
> in the brainwashed masses. That is why the 3 bears are now eating
> the porridge.

Apr 22 02:06 PM

[Fred Voetsch:]

The data you want is here:
www2.standardandpoors....
...directly from the horses mouth.

P/E ratios should only be based on as-reported, 12 month trailing earnings to have any validity at all. See S&P's notes here:
www2.standardandpoors....
...for more info on that.

BTW, can someone tell me why the Wall Stret Journal is reportin a P/E of 13 for the S&P using data provided by Birinyi Associates?

Since Birinyi Associates has a clear conflict of interest (they have publicly stated monts ago that they have a bullish stance and they are both investors and providers of data) I believe its obvious that they are INTENTIONALLY providing bad data to the WSJ and the WSJ does not seem to care.

A few weeks ago I noticed that notice that the P/E's on the page at
online.wsj.com/mdc/pub... were worng and instead of using the correct data they removed the notice that said P/E was based on "as-reported" earnings. In other words they were reporting the data they WANTED to report and were LYING TO US.

Folks, we are being lied to and cheated at every turn by the people who are supposed to be looking out for us. Get ready for some REAL rough times ahead.

Apr 22 03:46 PM

[Fred Voetsch:]

Excellent! I have been trying to inform people of this for months and nobody seems to care. The more voices the better.

DJIA P/E is currently 27
DJTI is 26
NASDAQ is 12 ? (I have seen it elewhere as 40 an dthe WSJ is now reporting inaccurate data as provided by Birinyi Associates so who knows?)
Russell 2000 is 39

Historical average is 15-16. In times like these (bad economy following boom years) we should expect an average of UNDER 15 and a bottoming that gives us a P/E ratio well under 10.

Apr 22 03:59 PM

[Allan Frain:]

Very recently the price (valuation) of housing was rising at 30% per year as rents were rising at 7%. That this persisted for several years and was offered as proof of a "new paradigm".

What is happing in the S&P at this moment is eerily familiar. Perhaps it should be referred to as the "same old new paradigm".

Apr 22 05:19 PM

[phfsarah1:]

AS reported earnings p/e (est are top down) for SP500
Estimates
03/31/2009...............
06/30/2009...............
09/30/2009............... ( 464 ) negatif

Source S&P index services
BTW your graphics are too small

Apr 22 11:33 PM

[phfsarah1:]

03/31/2009.....127.64
06/30/2009....1932.00
sorry


On Apr 22 11:33 PM phfsarah1 wrote:

> AS reported earnings p/e (est are top down) for SP500
> Estimates
> 03/31/2009...............
> 06/30/2009...............
> 09/30/2009............... ( 464 ) negatif
>
> Source S&amp;P index services
> BTW your graphics are too small
>
>
>
>
>

Apr 22 11:35 PM

[Vox Rationalis:]

Fred Voetsch wrote:

> Historical average is 15-16. In times like these (bad economy following
> boom years) we should expect an average of UNDER 15 and a bottoming
> that gives us a P/E ratio well under 10.

I think you weren't paying attention. Trailing 12 month P/E is going to go NEGATIVE. Based on this, exactly what level do you think reasonable for the S&P 500?

Apr 22 11:40 PM

[Lee Eugene ...:]

Thanks Fred, I will keep this stuff coming. Just wait, the people at S+P estimate the trailing 12 month in Q3 will be 1900! I just can't make this stuff up!!!!


On Apr 22 03:59 PM Fred Voetsch wrote:

> Excellent! I have been trying to inform people of this for months
> and nobody seems to care. The more voices the better.
>
> DJIA P/E is currently 27
> DJTI is 26
> NASDAQ is 12 ? (I have seen it elewhere as 40 an dthe WSJ is now
> reporting inaccurate data as provided by Birinyi Associates so who
> knows?)
> Russell 2000 is 39
>
> Historical average is 15-16. In times like these (bad economy following
> boom years) we should expect an average of UNDER 15 and a bottoming
> that gives us a P/E ratio well under 10.

Apr 29 12:03 AM

[CaptainJJack:]

I am curious.

How do you assess a negative P/E for a single company?

What if the loss was caused by a part of the division being slowly shut down and while losses in the division will continue, the size of the division will be much smaller in the future? Would that change your assessment?

How would you assess the P/E for a company if the Earnings were zero?

How would you assess the S&P 500 P/E if the Earnings were zero instead of negative?

May 19 08:43 AM