The Price / Earnings Dilemma for Bulls

By Bob O'Brien

The economy is improving and the stock market is slowing down. This makes perfect sense as investors take a break and decide what the economy will look like in a couple of months from now and in 2010. Much of the “less bad” and “not so bad” news has been priced into the stock market already.

We are going to need some really good news, which leads to earnings that help expand the economy and job market for this stock market to keep going significantly higher from this point. As opposed to earnings from government stimulus, job cuts, and competitors going out of business.

The current P/E ratio on the S&P 500 is 17.5, and to be bullish right now is a bet that earnings are going to be there in the future for the majority of companies that make up the S&P.

Will the earnings be there? At this point and time, I have trouble seeing it! There are a lot of variables out there that remain and ultimately many liabilities on this economy for years to come.

We may be in for a deflationary cycle for a couple of years, and then when we do arrive at real growth there is nothing but a pile of debt waiting for us after that. You’re really in denial if you think that lower taxes and less regulation is in our near future.

Jobs have to be a real concern as well with fewer people producing more and more though automation. The recovery after the 2001-2002 recession was a jobless recovery, will there be another one?

The consumer has been beaten down, and does not like to consume the way he once did. He is a saver now, and although this is a good thing for the long term economy, this is not a good thing for earnings in the near term.

Commercial Real Estate is another concern and the effect that it may have on overall confidence of the system, and the regional banks. The rumors as to how bad this is really vary, but any way you slice it is definitely going to suck a lot more money out of this economy.

Original article

Comments

[NUCLEAR1929:]

earnings of 1990's were not real earnings, it was the amount of money raised, not profits
Now it will bite for decades, thats why $ at the moment is worth a napkin

Sep 09 09:55 AM

[Nick36:]

I don't know how you can say that the P/E of S&P 500 is 17.5. When the S&P website say this P/E is 129.19. And they know better than anyone else knows what this P/E is.
www2.standardandpoors....

Sep 09 04:32 PM

[MSUSheff:]

P/E of 129.19 includes write downs. 17.5 ignores these.

Sep 09 04:44 PM