Is the best over for the U.S. stock market this year?
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.
U.S. Stocks at 25.8 Times Profit Means Rally May End
Michael Tsang and Jeff Kearns
Bloomberg, September 2 2008