Here’s a snapshot from the latest S&P 500 earnings file (paste the following link into your browser or google “S&P 500 earnings” for the whole Excel file: www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS):
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The average estimate for 2009 earnings is now under $40 (for a PE of 27 using today’s price), since Q3 and Q4 have been revised way down from earlier this year. Now analysts think Q4 could only come in $1 better than Q1, which was horrible.
These numbers make you wonder if accountants used up all of their tricks to boost the bottom line in Q2. The reality of shrinking sales and margins can’t be hidden forever.
The estimates for 2010 and 2011 earnings are now $45 and $61, respectively, and 2009 dividends are projected at $22 (back to 2005 levels from $28 in 2008, for a piddling 2% yield). Even if profits recover as projected, the market will have to maintain the current extreme multiple in order to deliver gains over the next two years. We are already trading at 18X 2011 earnings! The PE at the peak in 2007 was 19, and look at where that got us.
My own take on earnings is that we will be lucky to see $30 in 2010 or 2011 for that matter. The debt overhang remains, and underlying asset values are so much lower than they were 12 months ago that another huge round of write-offs is needed, which will directly hit the bottom line. Households are digging in, and banks are still pulling in credit. The consumer economy is not coming back, and corporate America will take years to adjust.
Stock prices are so far from fundamental support of any kind that this market has to be counted among the greatest bubbles of all time. Many observers understand that this is a bubble, and are wondering what it will take to bring prices back in touch with reality. My answer is nothing — the market will simply turn with social mood, which has no master but god. The facts are always there, but traders aren’t always in the mood to check.
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Do you think JPM, GS, etc. can use TARP money to keep a bid under stocks at approximately the current levels indefinitely, and hope for an eventual, albeit slow, recovery? Maybe they were instructed to do so. A cratering stock market’s downdraft on 401k’s and life insurers could cause social unrest.
Anybody who’s worked in an investment bank knows that these conspiracy theories are ridiculous.
Stupidity is always a better explanation. Look at the banks, if they were so clever, they would have sold all those CDOs instead of keeping them for themselves believing they were as valuable as gold.
Yes, I agree, stupidity reigns always! You can bet your bottom dollar! LOL!
Well, you guys may be right, but Zero Hedge posted a similar article on 10/25/09 “An Overview Of The Fed’s Intervention In Equity Markets Via The Primary Dealer Credit Facility.” In general, I find that site’s analysis incisive and credible.