Bloomberg says the consensus S&P 500 operating earnings estimate for 2012 is approximately $110. Standard & Poor's estimates 2012 at $111.46. At the other end of the spectrum, Doug Cliggott estimates $81.00.
Cliggott is chief U.S. equity strategist at Credit Suisse, and was formerly chief investment strategist at J.P. Morgan.
Standard & Poor's and Cliggott may make reasonable bookends for projection ranges in scenario analysis. We would be reluctant to use an estimate above that of Standard & Poor's, because that is about at the consensus level, and the evidence shows a negative tilt to economic and profits projections.
Standard & Poor's estimates 2011 at $98.04. That puts today's 1160 on the S&P 500 trading at about 11.8X. When the index was at about 1365 in late April, the multiple was about 13.9X.
If S&P is right about 2012, then the current 11.8X multiple of today would probably hold. More likely, since the profits would not have fallen, the current market level would probably seem too low, and the 13.9x of April might be seen as more appropriate.
If we apply the 11.8X to 13.9X multiple to the $111.46 estimate, we get an index price estimate of 1315 to 1549.
However, if Cliggott is correct, then today's multiple may be the top, and 8X could be the bottom, perhaps more likely 10X.
The $81.00 times the 8X, 10X and 11.8X would result in an index level of 648 to 810 to 956.
For contrast, the following chart projects the 90% probability range for the index based on the trailing one-year volatility of the index. The high and low of that projection is 1515 and 888.
Side Note: The red lines mark 5%, 10% 15% and 20% offsets from the 1 year trailing highs.
Click to enlarge
If the probability were to be set at 80%, the high and low of the range by 12/31/11 would be 1429 to 942.
See our recent article "How Far Is Down?"
Directly Related Securities: SPY, IVV, VFINX.
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