Even though we're in the midst of earnings season, most investors really have no idea where earnings are going to be in the future. While the consensus forecast for 2009 is currently around $95, there probably isn't a person on the planet who thinks earnings will be anywhere near that high. But how much further below $95 will earnings be, and what multiple do those earnings deserve?
With that in mind, we created a matrix to show where the S&P 500 would trade based on different combinations of earnings and multiples. Boxes highlighted in red indicate levels within 5% of where the S&P 500 is currently trading. As shown, if (and we realize there is really no chance of this happening) the consensus for 2009 EPS forecasts proves to be accurate, the S&P would currently be trading at about 10 times next year's earnings.
So where are earnings likely to come in next year? One of the more bearish forecasts making the rounds is that earnings for the S&P 500 will come in at $60 per share next year. If that forecast proves to be accurate, that would bring the current multiple of the S&P 500 to about 15.5 times next year's earnings. While a multiple of 15 is by no means extremely cheap on a historical basis, it is hardly expensive either.
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So what is the combined lowest analyst estimate? Surely at least one analyst has lowered '09 estimates on each S&P500 stock to dire expectations. Using that might give us an indication of the worst case scenario.
Posted by: Stonefoxcapital | October 29, 2008 at 01:48 PM
Last week, the low est. was $82 -- which is unchanged since mid-August, when it was $91. The high est. is $108, according to my numbers.
Posted by: Scott | October 29, 2008 at 05:39 PM
It also might be useful to note that the mean and median P/E ratio for the S&P 500 is roughly 15.4 for the last 5 years.
Posted by: Scott | October 29, 2008 at 05:53 PM
Are you using operating earnings in your calculations?
Shouldn't you be using reported earnings?
Based on S&P's earnings estimates (http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,1,5,0,0,50,0,0.html)
12 MONTH OPER EARNS PER SHR (bot up) = 94.25
12 MONTH AS REPORTED EARNS PER SHR (top down) = 48.52
The S&P 500 index is now around 950, so that gives a P/E of a bit over 19.
Posted by: Phil | October 31, 2008 at 05:33 AM
@Phil, the numbers I referenced are 2009 *forecasted* earnings -- same as in the commentary above -- not trailing *reported* earnings.
Posted by: Scott | November 03, 2008 at 03:58 AM
Phil, is correct the 2009 forecast here of $95 is not GAAP earnings at all but is operating earnings. S&P currently shows that estimate updated to $86. Their forecast of actual GAAP earnings is (get ready to jump out the window) $49. Forward P/E of about 871/49 = 18 , not so cheap at all...
Read it and weep here
http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
S&P itself has a nasty habit of reporting the forward operating P/E based on bottom up as THE P/E when in fact operating based on top-down is a higher P/E and actual GAAP earnings shows a much higher P/E.
Our author no doubt got mis-lead by S&P....
Posted by: Shawn Allen | December 03, 2008 at 11:58 PM