SPX Earnings & Multiples ?

There’s an interesting article in today’s WSJ in which (coincidentally), I have a brief quote in:

"The financial system is undergoing a sea change that is forcing a global sell-down of assets. Even when this is complete, there is likely to be greater restraint when it comes to the use of borrowed money to juice returns. At the same time, investors are likely to demand a far higher price to take on risk than in the past. Even if financial stocks feel the brunt of these changes, few, if any, industries will be unaffected.

That argues for prices that reflect reduced expectations of future profits. Yet consensus estimates peg 2009 aggregate operating earnings for companies in the Standard & Poor’s 500-stock index at about $94 a share, according to Thomson Reuters. That figure assumes earnings growth both this year and next.

If those estimates panned out, the S&P on Friday would have traded at what looks like a bargain multiple of about 9.3 times forward earnings. Shift earnings to the lower end of the consensus range, about $75 a share, and the multiple rises to 11.7 times.

That still might seem cheap compared with multiples that often exceeded 20 times during the 1990s. But it is well above trough valuations of about eight times seen during the depths of the 1970s bear market, according to data from UBS. And the economic outlook, along with the unwinding of the credit bubble, means it is unlikely that earnings will increase this year or next. The better question is how far they will fall.

Bears are well below the consensus in their answer. Barry Ritholtz, director of research at Fusion IQ, for example, says he reckons that 2009 earnings could drop to about $50 a share. In that case, even a multiple of 14 times would bring the S&P to about 750 — nearly 15% below current levels."

Good stuff . . .

Autumn Is Here. Now for the Fall…
WSJ, OCTOBER 25, 2008

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