Is the best over for the U.S. stock market this year?
That’s the question a Bloomberg article asked about the US markets. (This looked like a dicey position for the first hour of trading yesterday).
Here’s an excerpt:
"The Standard & Poor’s 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter through last week, the only gain among the world’s 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.
Money managers at Federated Investors Inc., Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won’t last because corporate profits will fail to meet analysts’ estimates. Wall Street forecasters, who were too optimistic about earnings for the past four quarters, predict income at America’s biggest companies will grow by a record 62 percent in the final three months of 2008, according to data compiled by S&P…
Analyst estimates were at least 26 percentage points too high since the fourth quarter of 2007 as they failed to anticipate more than $500 billion of subprime-related bank losses and a slowing economy, according to data compiled by S&P and Bloomberg."
Note that S&P 500 earnings consensus is for $21.69 in Q3 — up 3.9% from a year ago. In Q4, the consensus is for $24.62 a share, up a whopping 62% from last year (these are weight adjusted estimates).
We’ve noted this valuation issue repeated this year, as well how wrong
the analyst community has been. Combine the two, and you end up with a
very challenging environment.
>
Source:
U.S. Stocks at 25.8 Times Profit Means Rally May End
Michael Tsang and Jeff Kearns
Bloomberg, September 2 2008
http://www.bloomberg.com/apps/news?pid=20601213&sid=a_zvHOtLeCis&
Death, Taxes, and Analysts being wrong.
Hey BR,
Yesterday – Kirk quoted that the trailing 12 month PE for SP came out as 69. Then went on to calculate the fair value for SP at 1173 based on 17 times earnings.
I tried to find that info about the trailing 12 months but couldn’t. Do you happen to know if that is true.
This ties into the Bloomberg article in that looking back a couple months, the trailing earnings on the Dow were 80+. They are nil now. These analysts are complete idiots and the pundits on TV keep using their “cheap on a forward basis” arguments when the truth is that the the forward PE is a guess.
Both 2007 and 2008 2nd half projeced recoveries are completely false. I remember both years watching the entertainers on TV talk about how cheap this market is trading at 15 times forward earnings. Where are they now that the actual trailing earnings are 25.8? I don’t see them coming out saying – yep, we were wrong, it was actually expensive to buy last year.
Criminal…
“Money managers at Federated Investors Inc., Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won’t last because corporate profits will fail to meet analysts’ estimates.”
Well…of course they will fail to meet estimates.
Moreover, it is easy to make an educated guess about the date this failure will become obvious. That’d be after November 4th 2008.
Here’s a hundred dollar bill on the table.
Anyone willing to bet?
Earnings estimate are far too optimistic.
I dunno: Cramer says that so many being so negative is a sure buy signal. And, we know he’s always right because he tells us so.
Of course! Who are the analysts implicitly in bed with? Therefore, it is incumbent upon them to falsify the facts – how else can the big hedge funds, mutual funds, etc., get out with the lest possible burn? I have been witnessing it from CFC to GGP, foreover the past two years now.
Just a quick clarification – BR has cited S&P’s forecast operating earnings per share. Their estimates of as-reported earnings per share for the S&P 500 are $17.82 and $16.33 for 2008Q3 and 2008Q4 respectively.
remember…the level of corporate profit margins are just coming off an all-time high (about 9%). corp profit margin is a very mean reverting series….so it’s HIGHLY likely corp profits will come trend towards historic norms (6%). But soooooo many analysts WILLFULLY NEGLECT that fact and project RECORD profit margins will sustain into perpetuity. And then the strategists tack a historically high PE on those earnings (that will VERY LIKELY continue getting revised down). Call me naive, but I’m not willing to buy things that are valued when they are at peak profit margins (about to contract materially) and a multiple that is in the upper end of the historical range.
so…margins coming down and the multiple is relatively high….yeah, best days aren’t right around the corner IMHO.
“Note that S&P 500 earnings consensus is for $21.69 in Q3 — up 3.9% from a year ago. In Q4, the consensus is for $24.62 a share, up a whopping 62% from last year (these are weight adjusted estimates).”
You might want to take a closer look at Q4 earnings. Financials, even if earnings recovery remains weak, are likely to see enormous gains YoY. BAC earned $0.05 in ’07 and should see a gain of > 15,000%. Many others were negative so the percentage gain is meaningless, but they should materially contribute to the overall (weighted) improvement.
So, unless the rest of the economy falls off a cliff (unlikely with an election looming) I don’t see a big YoY improvement as unfounded.
Barry,
I believe you were the one to voice it, although most of us thought it was goofy when we heard it…
GM today not only does not increase prices for 2009, they are adding the 2009 line of vehicles to the discounts already offered on the 2008’s
http://biz.yahoo.com/rb/080903/gm_employeepricing.html
Going to get interesting…soon.
Bruce in Tennessee
Why does the estimate of corporate profits by an analyst effect the price of a stock? If they underestimate, the price goes up and investors ignore them but when they overestimate investors seem to take their guess as holy writ. I must be missing something because it appears to me that the prevailing mood of the market is panic, which I suppose is predictable when your idea of a long term investment is anywhere from twelve hours to one week.
The largest one-year returns for the stock market are when yr over yr earnings have fallen -10% to -20% (you’re buying at a depressed level). The worse returns historically are when the previous years earnings have fallen greater than 20%.
Mike in Nola,
Ha! I caught Cramer with the same thing, then was going through street.com yesterday night and noticed his claim that yesterday’s rally was for real???????
He’s also called a bottom in housing in the next 301 days, which is basically his entire thesis for calling bottom other than what you cite.
By the way, did you end up taking a position in DUG? I think at the time you and I discussed it was at 33 or so, you would have made a decent profit by now.