As noted previously, at times, things like “valuation” or the economy or earnings don’t matter — until they suddenly do.
Here’s Rosie via Abelson:
“David Rosenberg, of Gluskin Sheff, notes that on an operating (“scrubbed”) basis the price/earnings ratio of the Standard & Poor’s 500 has expanded a whopping 10 points since its March low, and stands at 27.6. Historically, Dave observes, when the economy is making the switch from contraction to expansion, as it did in the third quarter, the P/E is 15.
Trailing earnings are untouched by clairvoyance, in contrast to forward earnings, which depend heavily on projecting the future. But such estimates have their drawbacks, particularly since Wall Street forecasters are a cheerful lot predisposed toward upbeat prognostication.
A year ago, equities were trading at a modest 12 times forward estimates. In fact, as Dave puts it, with perfect hindsight, the market at the time was really trading at 30 times forward earnings.
Currently, Dave reckons, the S&P 500 is priced for $83 in operating earnings, or double the most recent four-quarter trend, and normally it takes five years for profits to double from a recessionary low. Such a feat would be more than a little impressive, since revenues, for the first time ever, have registered four quarters in a row of double-digit decline.
Given the going estimates for operating earnings of $48 a share this year, $53 next year, $63 in 2011 and $81 for 2012, he concludes that “the market is basically discounting an earnings stream that even the consensus does not see for another two to three years.” In Dave’s book, stocks remain more than fully priced.”
I have no idea when, but Dave’s approach will eventually be correct. However, it will also eventually be 2011, two in the morning and April.
The difference is, we know precisely when those things will occur. I have no idea when valuation will matter again . . .
What Does the Economy Have to Do with the Market? (October 6th, 2009)
The Most Hated Rally in Wall Street History (October 8th, 2009)
Are Stocks Cheap? (June 14th, 2009)
Is the U.S. market “cheap”? (November 14th, 2008)
SPX Earnings & Multiples ? (October 25th, 2008)
Ganging Up on the Dollar
Barron’s OCTOBER 12, 2009