2009 S&P Earnings: Don't Believe the Analysts

Early this year, I took a look at the projected operating earnings for the S&P 500 based upon aggregating all of the components (bottom up).  It was rather clear that the numbers were too optimistic.  I evaluated the data that was on the S&P website (click to enlarge, below):

I concluded at the time:

I expect that earnings for the S&P 500 will be no higher than 80 (-5% to -10% from 2007, which isn’t yet fully reported and likely to be lower than the 87.45 currently projected). While I would expect the forward PE to not decline further, I don’t look for it to expand much this year, as I expect longer-term yields will rise and credit spreads will remain wide. If I use the current 14.5 forward PE and project 10% growth in 2009 (88 EPS), I get a year-end target of 1276 (-13%). This target ties in with a more technical/seasonal approach that I will share below.

Well, indeed, as you can see in the table below (click to enlarge), the estimates have come down, slightly lower than I projected.  But, once again, the outlook for the coming year appears to be WAY off:

As I begin to think about the potential direction and magnitude of change for the market next year, I am initially concerned that the 2009 estimate is so unrealistic.  I have highlighted the areas that seem to aggressive:  Will Energy EPS actually grow?  Will Financials recover that much?  Will Consumer Discretionary recover that much?  Why is Tech always expected to grow in excess of 20%?  I am comforted, though, by the fact that the market clearly doesn't believe these numbers (11.4 PE).  Note to analysts:  Check your models! 

To think about 2009, you actually have to begin to think about 2010, as the year-end price will be a function of expectations for 2010 (what earnings, what multiple).  I think that this year will end up being a bit worse than I originally expected and slightly below the current outlook. 

EPS next year should be up about 10%, though probably back-end loaded.  I end up with an S&P 500 EPS of probably about 80.  If I project 15% for 2010, as the recovery is likely to be underway, I get $92 for 2010. 

With credit spreads hopefully declining by then, I would project a PE of about 16.  That gets us to 1472, quite a bit higher than the current market.

The challenge in my opinion is more likely to be the right multiple as opposed to the exact earnings.  I come from the old school that believes the PE ratio should be elevated at the trough in earnings.  I can justify a 18-20 PE, which would get us to 1500-1600 if earnings in 2010 are still depressed in the $80 area.

Disclosure: None

Comments

[Steven Hansen:]

of course the earnings per share are based on a certain economic model which requires growth in 2009. with:
1) at least a trillion dollars (7% of gdp) targeted for economic stabilization,
2) zero for economic stimulus,
3) $5 trillion of evaporated assets
4) a consumer in crisis
i think i'll wait until i seek the whites of their eyes until i start betting on an economic recovery.

2008 Sep 26 03:16 AM

[Fred Voetsch:]

Wow, you're from the old school? I don't think so.

PE ratios in bear markets are often as low as 5-6. When you have plunging earnings as we have now and are likely to continue to have for at least a year or two or three or ten we should expect the market to bottom out somewhere around 200-300. Yes, history suggests that but of course anyone who can't see beyond 1985 will only accept it when he sees it for himself.

Book value is historically high if you consider at least a full generation of investors (80+ years) so that you get a full cycle and that is much more accurate than PE. Book value for the DJIA is near 2x historical mean averages and should be expected to go to .5x if we see ann exonomic climate like the 70's or 30's, which we obviously will.

Sorry, Alan, but you really need to learn more about history and depend less on what you have seen in YOUR lifetime.

--Fred Voetsch

2008 Nov 14 04:20 PM

[Alan Brochs...:]

Typically, when PE ratios have been as low as the range you indicate, interest rates have been higher. Today, interest rates are higher than they appear due to the off-the-charts risk premium. My data on the DJIA goes back only to 1968 (almost my lifetime!). The two times that the trailing PE ratio was as low as 6 were 1974 and 1980. In the latter, interest rates were very high. In the former, the Baa bond yields were similar to today, though slightly higher (over 10% vs about 9% today). While a plunge in earnings could leave the PE ratio low on a trailing basis, I wouldn't expect stocks to trade at "5 to 6 times" forward estimates.

If you want to wait for earnings to plunge, which they will, and then try to buy stocks at 6X those earnings, good luck. You could be right, but I wouldn't bet on it. I wouldn't rule anything out in this environment. If you noticed, the article above was written before the big meltdown, so the numbers in it are not ones that I would suggest today regarding my outlook for earnings.

2008 Nov 14 04:34 PM

[Fred Voetsch:]

"My data on the DJIA goes back only to 1968 (almost my lifetime!). The two times that the trailing PE ratio was as low as 6 were 1974 and 1980. In the latter, interest rates were very high."

Don't take this as a personal attack but you need to expand your frame of reference and use data that goes back farther. If you don't you are doomed to make mistakes that could be avoided. P/E ratios will also hit lows of 5 or 6 in periods of deflation and that is what we have. The difference is that the P/E will likely stay high until the turnaround because periods of deflation are worse for the economy than inflation...just look at the Depression vs the 70's. The 70's was driven by too much growth based on a strong, growing demographic of young people entering the job market while the 30's and this period are based on a deflation of decades of excess speculation, and in this case, a very glum outlook for our future based on an aging population, a high rate of debt, low savings, deflation of our personal wealth (retirement accounts, home values, etc) and last but not least, the massive debt that will have to be paid off by taxpayers over the coming years and perhaps decades.

Add to that the fact that financial tensions often lead to wars. Things may seem peaceful now but so they did in 1930.

Look at the difference between the high of 1929 (380) vs the high of 1973 (1050) vs the high of 2007 (14,000) and do the math. The more air (speculation) in the bubble the worse the blast when it pops. The bubble is popping and everything is coming down in price and it shows no signs of stopping for quite some time.

Listen to objective experts like Nouriel Rubini and Meredith Whitney for information that is factual instead of listening to people like Jim Cramer or the other talking heads on CNBC, most of whom have been dead wrong for over a year as people lose massive amounts of wealth.

Don't go down in flames, my friend. Use facts and you will be fine but don't make all the same mistakes all these other people make. Look out over a whole generation or more and you will have a huge advantage over those with limited vision. The world isn't coming to an end but the world as you knew it has come to an end; adjust or perish. ;-)

--Fred

2008 Dec 13 03:23 PM

[Fred Voetsch:]

Here here!

A decent strategy is to dollar-cost-average in over a period of years, if one must be long the stock market. That is a strategy that seems to work in any market with the possible exception of the Japanese stock market over the past 20 years...uh oh!

Well, I'm staying short and small and will start to go long again once we quit doing stupid things like trying to keep people in houses they can never afford (especially in a bad economy) and rescuing companies so they can keep good companies from prospering.

ALso, has anyone else noticed that the guy doling out billions of tax dollars is the same guy who went before congress as CEO of Goldman Sachs and got them to change the rules that allowed us to get into this mess in the first place? ...just an observation....

--Fred Voetsch


On Sep 26 03:16 AM The hand wrote:

> of course the earnings per share are based on a certain economic
> model which requires growth in 2009. with:
> 1) at least a trillion dollars (7% of gdp) targeted for economic
> stabilization,
> 2) zero for economic stimulus,
> 3) $5 trillion of evaporated assets
> 4) a consumer in crisis
> i think i'll wait until i seek the whites of their eyes until i start
> betting on an economic recovery.
>

2008 Dec 13 03:33 PM

[Fred Voetsch:]

Can we go down a road of logic?

Would you agree that in a period following decades of a higher than normal P/E ration that we should expect to see a mean reversion, causing the P/E ratio to be lower than normal? This is based on the belief that the economy cal only grow so fast over time and must average out over time.

Would you agree that the average P/E ratio over a full generation (80 years) is approx. 14?

Would you agree that debt in AMerica is at a historic high for the consumer?

Would you agree that savings are at a historic low?

Woudl you agree that housing prices are dropping faster and farther than ever in the history of our nation, or at least since the great depression?

Would you agree that our population is aging and that this trend will continue for a decade or two and that this is not conducive to growth of the economy?

Now, given all those FACTS, doesn't it make sense that you should NOT be optimistic about the stock market for at least a few years?

--Fred

2008 Dec 13 03:44 PM