S&P 500 Earnings Update: The Index Is Still Extremely Overvalued

Standard and Poors puts together the index earnings/core earnings that are used to calculate earnings for the S&P 500 (^GSPC).  From these earnings, hopefully, we can glean some information that might help us to understand and/or value the SP500 Index.  The link to the site is here.  This will open up the excel spreadsheet that will give you up to date information on the earnings.  Before we look at the earnings, I thought it would be interesting to look at the comments of the SP Analyst that puts this together.

I found the above comments posted on the top of the SP500 earnings spreadsheet to be sort of concerning. It seems that he’s all but thrown in the towel.  The sense, just from his tone, is that it’s bad and getting worse…FAST.

The analyst also notes that “As reported” earnings are negative for the quarter.  A First.  You can see below, that with 65% of the companies reporting 4th quarter earnings, we’re at  -$3.14 for the fourth quarter.  With little or no expected upside for earnings on the horizon, and the SP500 trading at current levels, we are still extremely overvalued.

If you believe that earnings are going to improve next quarter, then perhaps there is a slight justification of the SP500 valuation, but not much.  Here’s why.

If you look above and add up the estimates for 2009, you can see that the estimates for 2009 earnings are currently at  $41.88 per share and 2010 earnings are estimated at $51.48 per share.  The current closing value of the SP500 on Friday 2/6/08 was 868.60.

Based on the estimates above:

• 2009 Estimated P/E for SP500 @ 868.60= 20.74x earnings
• 2010 Estimated P/E for SP500@868.60  = 16.87x  earnings

The next question is: are the earnings estimates viable?  The earnings estimates for the 2009 quarters are basically:

• 2009 1st Quarter   $9.87
• 2009 2nd Quarter $9.57
• 2009 3rd Quarter  $11.13
• 2009 4th Quarter  $11.31

With those estimates, there is an improvement baked in that in the first quarter of 2009 earnings will improve from the current $-3.14 to  $9.87 which is an improvement, quarter over quarter of  $13.01.  That’s roughly a 414% improvement in earnings from current levels.  Those expectations are pretty solid - HIGH expectations.  If those estimates fall short in the first quarter and/or the other quarters then we could expect to see PE ratios move higher.

It’s no wonder that the government is seeking to get rid of mark to market accounting.  They know that earnings are on the decline.  They have to do whatever they can to increase or support earnings.  The chart below shows the potential for a drop in the SP500, if earnings do not show any improvement.  The area highlighted in yellow is what I think is the most realistic, unless the government starts to artificially create earnings for companies by changing the rules to the game.

When you hear Barack starting to talk about a “catastrophe” on our hands, I firmly believe that this is what he’s referring to.  If the SP500 were to drop another 40 or 50% from this level, then there would be social unrest, riots and possibly revolution.  It will be interesting to think about how the government is going to prevent the SP500 from dropping further.

They need to manufacture earnings somehow.  Banks will need to start to show profits. If earnings continue to drop, then it’s likely that the SP500 will also drop.  If you look at reasonable valuation levels, there’s no doubt that we could easily be at the 500 to 600 level - very easily.

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Comment by James

2009-05-12 22:24:45

That was “exactly” what Obama did! Manufacturing the earnings, but we don’t care.

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Comment by Chris Matuszewski

2009-05-18 10:48:32

Although I agree that current PE ratios for the S&P 500 are too high to indicate a bear market bottom when compared to previous major bears, I question whether this is indeed a valid measure for today’s day and age. We have never had as much market participation in the stock market as we have now, and I believe that there is currently a lot of money trying to find reasonable rates of return. I think this time around, people are willing to pay a higher price for the future returns that stocks promise to provide.

Please have a look at my blog for some more thoughts on the subject:

http://www.ourmoneytoday.com/2009/05/to-buy-stocks-or-not-to-buy-stocks.html

Thanks,
Chris

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Comment by ted

2009-11-10 15:39:23

How wrong were you this year? Market has soared and is still cheap.

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