http://www.nytimes.com/2008/11/16/business/16fund.html?pagewanted=1&_r=1 "âCheap valuations are simply a symptom of whatâs wrong, not the catalyst to get the market out,â said Richard Bernstein, chief investment strategist at Merrill Lynch. After all, just because stocks are trading at extremely low levels today, it doesnât mean they canât become even cheaper tomorrow." ... "The most recent survey taken by Mr. Bernstein, about two weeks ago, shows an allocation of around 58 percent stocks. While thatâs down from the mid-60s percentages of the start of last year, itâs still far from real pessimism. âWeâre still hovering right around the long-term average,â he said. His own assessment is more bearish. He recommends allocating 50 percent in stocks, with the rest in bonds and cash." ... "While profit projections have declined, they may still be way too bullish. According to a survey of analysts by Thomson Financial, earnings growth estimates for S.& P. 500 companies in 2009 have fallen well below the rosy 22 percent forecast at the start of October. Still, theyâre expecting corporate profits to grow more than 12 percent next year. Since many are predicting a difficult first half of the year, thanks to the weakening economy, this would assume a tremendous profit surge in the latter half of 2009." "Christopher N. Orndorff, head of equity strategy at Payden & Rygel, an asset manager based in Los Angeles, predicts that âthe earnings releases in January are going to be poor.â That should drive down earnings forecasts for 2009 even lower, he said." "If earnings forecasts begin to fall substantially, he said, âit will be very difficult for stocks to rally.â "
Clearly these present valuations are pricing in a decline in future earnings. The break though has been about reducing multiples. On it's high late last year CME was around 47x 2007 earnings. Today it's forward p/e is 11.
Exactly but where can the P/E drop to I have seen articles talking single figures around 8 that is a scary number
I think you're using a 2 quarter trail mixed with current. I have current at 13.85x on earnings of $53. On the lows the market was 12x current. "Current P/E ratios also support a gloomy outlook. Compared to average P/E levels, markets are signalling a 23% earnings decline in the US, 33% in Asia and 40% in Europe." http://www.asianinvestor.net/article.aspx?CIaNID=89020
Either the recession is a myth or these analyst estimates are even more useless than usual. It's very difficult to estimate next 24 months of earnings. One rule of thumb you can try is take TTM PE and multiply by 1.5. If that's a number you're comfortable with on a fundamentals basis - go for it - you *probably* have enough room for error to come out alive. You can also adjust the multiplier up and down based on how much debt vs cash the company has. Eg, AAPL has no debt and enough cash to buy about a quarter of the Dow components - INTC is loaded with cash and maintaining profitability AND has already warned AND pays a divie - etc. Conversely, companies like FON that are loaded with debt - for me, and my holding style - no level of PE is low enough. IMO, we are only just now starting to see potential bargains on a fundamentals basis. If this recession is real, we are going to see a lot more, which likely means another 20-40% off the indices sometime next year. Unlikely to happen in a straight line, though. Should be entertaining if nothing else.
It appears the writer is confusing "earnings" with "earnings growth" in that sentence. At current PEs, a decline in earnings growth is more or less priced in - not an actual decline in earnings.
I've been using $56 from an SP spreadsheet. That number is a bit old... the most recent number I can find currently (Oct 29, 2008) is "$48.52, 12-month as reported earnings"... With the SP @ 873, that's still 18x earnings. So, if earnings drop further... and the P/E multiple declines into the "value range" of "10x or less", the market is going much, MUCH lower.