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Bloomberg today is reporting that equity analysts (collectively) are estimating that profits on the S&P 500 companies will rise 32% over the next year (which data point I've added to the above chart). That would put profits at $85.96/share, just shy of the record $89.93/share registered in September 2007. That adds up to a pretty significant V-shaped recovery I'd say, and it also says that stocks are not expensive at all at current levels.
15 comments:
Excellent news!
I have wondered about this bull market (btw, ho-hum, market up again today).
The p/e's are already pretty high, not like the single digit p/e's we saw in the late 1970s.
So, this bull market may enjoy some expansion of multiples, but mostly it has to be earnings driven.
Indeed, I hope we do not go back to the days of Coke selling for 35 times earings. That would suggest bubble.
A 32 percent rise in corporate profits has got to mean a good year ahead for equities. I hope.
Analysts and investors are beginning to "Bubble-Up" with the surprize earnings increases, but how much of this is simply a write-up of the formerly devastated FAS 157 assets. No one seems to know! While there is a recovery, FAS 157 which blinded all on the downside is doing the same on the upside. I do not think we are in a "New Era"
Over the last 30 years the S&P 500
earnings per share to NIPA corporate profits after tax ratio has had a historical median of 7.4%.....NIPA corporate profits after tax is projected to be 1225 by the end of 2010. 7.4% of 1225 gets you
an S&P 500 EPS of 90.65.
Brodero,
Good post. What multiple would you assign to those earnings?
Benj,
Don't get too complacent. The market is overbought and ripe for a correction IMO. I am waiting for some more weakness in the financials. We may well get it. The Goldman Sachs suit, the looming financial legislation, Greece, plus the somewhat extended market action has me short term cautious.
Color me 'bullish long term, cautious short term'.
http://www.cityam.com/news-and-analysis/allister-heath/memo-analysts-you%E2%80%99re-too-bullish
Great chart Scott. What is the average growth of each of these earnings lines from the start to now. If drawing a trend line through them, is the current earnings # above or below the trend line?
If below, then one could surmise that earnings need to accelerate to reach trend.
Also, has the mkt already built in accelerating earnings? Over the next 12-18 months with more normalized earnings growth wouldn't we may see a decelerating market: higher prices, but much tought to reach new highs?
John-
Sure, there is always some bad news out there. But if earnings rise 32 percent in one year, that will swamp everything else. The DJI will go up, rather steadily I would guess--if earnings really rise as much as expected.
I sense another secular bull market brewing, perhaps slow afoot, but persistent.
After all, DJI still below 1999 levels, property is selling for half-off from peak, and interest rates are low and are going to stay low for a long time.
That will mean that cash migrates into equities and property. And global savings rates are high.
Benj,
All true. But markets never move in a straight line for long - and we're into the ninth straight up week. I'm not afraid of the coming correction for the reasons you cite. I'm doing a little trimming and waiting for what I think will be somewhat lower prices on some things I've been watching. I'm still VERY long the market overall.
If we assingn a 15X multiple to Brodero's $90.65 S&P earnings we get ~S&P 1360. 1360 less today's 1212 close leaves ~12% upside. Still a good number.
I would like to see Scott's take on a S&P earnings multiple. Is 15 reasonable? More? Less? You too Benj. Whatcha tink?
One more thing. If we use Scott's ~$86 number, assign a 15X we get S&P 1290. 1290 less 1212 = 78
That is ~6.55% above today's close. Not nearly as good.
I still think we need a pullback.
John-
Th Art of Divining Proper Multiples is way above my pay grade!
I guess 15 times multiples is good enough if we expect several more years of growth, and I do. Sure, 15 times earnings is fair.
Like I say, this is not a seriously undervalued equities market, such as in 1979, or at 7,000 (recently).
Still, I just don't see that investors have a lot of options: I contend they will have to settle for extremely meager, and maybe even negative returns in safe yield investments such as TIPS in years ahead. Too much money chasing too few deals.
Well, that leaves equities and property. The longer things appear to have "settled down" from our near-death experiences of 2008-9, then the more you will see cash migrating into equities and property, and more and more into riskier sections of those two investment sectors.
My big rough-house guess is that earnings will double in the next five years, and so will the broad indices. Property will reflate (to use Grannis' word).
Well, I guess I am an optimist. So be it.
gp1093mp: I think that however you draw a trend line, S&P500 earnings are below it, so we are quite likely to see above average earnings growth for awhile. Obviously things will have to slow down as we return to trend. Not sure when that happens though.
Re: multiples. As of March, the S&P 500 multiple (using trailing 12-mo. earnings) was 17.9. The average multiple since 1960 is 16.7. 15 sounds like a conservative number for now, given that inflation and interest rates are still low (lower inflation tends to lead to higher multiples and vice versa). As John points out, that shows there is still reasonable upside, though not impressive upside. I suspect that if earnings do indeed grow 32% this year, then the economy will be poised to grow at an above average rate next year, which means that multiples could well exceed historical averages for awhile.
Well we are getting our selloff today in spades. There is probably some more to go but I am looking to add to my financials and nibble at some more BHP and POT. Not yet. Soon. Very soon.
We are going to have a populist headwind to fight. The GS hearings are political theatre. Over time rising populism is not good for the markets. As Public Library has argued (quite well in fact) our gov't has its fingers in far too much of the economic pie. A lot of this is going to have to be exorcised and it won't be fun or pretty. Another longer term headwind. The economy to me is still vibrantly expanding so profits should continue to rise as Scott's charts indicate. However I'm going to stay with a conservative 15X S&P earnings multiple as an overall valuation gague for now. That gives us a 1275 - 1325 S&P ceiling for this year if we use earnings of $85 to $88. We're still well under it but we need lower prices to make newer investments worthwhile.
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