Market Not Buying Forward P/E Estimates 21 comments
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A major argument for the bullish case is that forward P/E estimates for the S&P 500 are very attractive. From Standard & Poor's website, you can download the historical and estimated quarterly EPS and P/E ratios for the S&P 500 at this link.
As shown in the chart below, the estimated P/E ratio based on bottoms up operating EPS is expected to decline throughout 2008 (the yellow line represents the estimates for all 4 quarters of 2008). The P/E ratio for the fourth quarter of 2008 is currently estimated to be all the way down at 13.49. Based on these estimates, the market looks very attractive. As shown, while the index is still very close to all-time highs, its P/E ratio is well below where it stood in the late 90s at similar market levels.
click to enlarge
But are these estimates actually going to play out? The P/E estimates above are based on estimated operating earnings. Below we provide historical and estimated operating earnings as provided on S&P's website.
As shown, earnings for the next four quarters are currently expected to be inline or higher than they were when the economy was roaring in late 2006 and early 2007. While the economy might end up not being as bad as everyone expects, we certainly don't expect it to be as strong as it was in recent years. These earnings forecasts for 2008 seem a little too high to us, and based on its performance recently, the market seems to think they're too high as well.
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The weak dollar & growing exports, and the emerging markets will provide a floor to the earning downturn.
Companies are also much leaner than before. A lot of core administrative tasks are now outsourced to third party providers who can provide economy of scale. Recent labor law changes, also allow more flexibility in the deployment of labor. So they can tune their operations on a much finer scale and react faster to economic changes. Plus advances in supply chain management mean that inventories are much lower than past economic slowdowns.
The drop in earnings is going to be less than other similar slowdowns in the past.
This bubble wasn't stocks, it was credit. Financials will be outsized on the negatives this year basically making overall market P/E is meaningless. BUT, if you take tech stocks - which ARE performing, many have a forward P/E of less than 15 with estimates that are decidedly understated.
If the bulls are relying on this to support the market, then I will enjoy eating bull meat served bloody rare.
from 11% to 8.5% (that is earnings). Given the Fed's potentially excessive stimulus, after the flights to safety subside it is not inconceivable to imagine the 10 year bond going to 6% and an overall stock market p/e of 16.5x (versus around 15 as of today). If all of that happens, you should expect to see the market drop by down to almost 10,000 or by as much as 18%. That said, if the 10 yr bond goes only to 5.5% all else equal we only have another 10% to go. If earnings go to 9.5% then we would have another 8% to go. So...how far is the bottom? Best guess is down 8% to 20% from here.
jegan ;-)
Earnings have fallen 54% from Q4-06. How can S&P earnings be so much more positive than the general market? I call the S&P estimates complete bull! Like those who said the subprime problem was "contained" a year ago, it is little more than wishful thinking and analyst hype.
We sneeze, the world markets catch cold. All a mater to time, and I see no way out. Sorry about that. Better get liquid while you can and hang on to your hat! It will be a long hard trek down the mountain of CDO's and CMBS defaults.
In that environment, forword or trailing PE's will make no difference, even to my dog.
Economies are becoming decoupled, not the markets. Markets are 85% psychological and trends repeat everywhere.
The cold/sneeze adage is reaching the end of its useful shelf life. The emerging economies will continue to grow; perhaps a 1-2% less than what they would have if we hadn't sneezed.
Check out El-Erian's interviews on CNBC's video collection. The guy is an expert on emerging markets apart from being one of the most respected investors out there (Harvard/PIMCO).
Here's what I know.
My crystal ball has always been reallly fuzzy. I have no clue what's going to happen next month, so I invest accordingly. I don't care about short term results, 90 day trends and can't imagine what signal I could find to pick the bottom better than everybody else.
What I do know is BAC is a strong company with good management that has performed year over year, it has more cash than others, and pays a great dividend.
I know BA has 750 orders, now delayed a year, for aircraft it will deliver over the next decade. It will make money, and my stock will rise.
AT&T and VZ pay a 5% dividend to sooth the pain if they moves up or down a bit. NAT has paid a 7% dividend for 10 years, but it's stock is down now, pushed down from a rediculous high based on one bad quarter..
Apple is innovative, has preserved cash. I believe in the company, and plan to hold because I think it will grow a little, or a lot, in the next few YEARS.
I've watched mine yo-yo from $70 in 2006 to $199, and nearly back.
Though it doesn't pay a dividend, I continue to protect myself, earn income and play the "banker" by selling options to folks who play the timing game. somebody just paid $27 for a $150 call for Jan10. My net for shares purchased at $126 this month is $99. Two years from now, if it expires I get to sell a new option, or, if I'm "unlucky" will be forced to sell at $150 for a 50% profit.
So, you guys keep betting the farm on the timing thing. I'll stick with looking for companies with solid management, 5 and 10 year track records of revenue and earnings growth, conservative cash management, dividends, and enough volitility to allow me to sell options over and over and over.
More I say!
Thank you.
We need more of this type of charting because 1) it is not
the type of thing you see on TV (hint hint - clicks "Mute"
button) and 2) it sparks good ideas that let one project into
the future and may encourage some people to buy SPX
puts (or whatever) to hedge their longs.
The fly in the ointment for bears (that's me, since I exist
in the real world) is the global situation. Chindia have tens
of millions of people constantly joining their version of our
middle class. They will demand western-style networking
(CSCO etc.) and housing (will LEN or TOL or HOV go
international?), equipment for raising animals for food (CAT,
DE etc.), fertilizer, and phones by the barge-load.
It's hard to figure how it all plays out when you combine it
with the fact that our entire financial system is deleveraging
itself into oblivion.