Monday, April 27, 2009

S & P 500 Earnings: What Are Equities Worth?

In theory, a company's stock should reflect its ability to generate future earnings. Traditionally, equity models would compute dividend pay-out rates based on how quickly those future earnings were expected to grow. In short, the better the earnings prospects, the more you should pay for a company's shares.

In the 4th quarter, the S&P 500 posted its first quarterly loss in history. Think about that, the entire index (on average) lost money.

- The above graph tracks the 12-month trailing earnings on the S&P 500. Currently, the index is trading at 865.30 (down a bit today). Trailing 12-month earnings total $14.88: price/earnings ratio of 58.15

- Some may say "Look at the future smart guy !" OK, I will.

S&P is forecasting the following 12-month trailing earnings:


I didn't bother to post the earlier 2009 numbers because they drop for 3/31/09 AND ARE NEGATIVE FOR 9/30/09.

So, jumping to 2010 we find an average $33.56 earnings number. The forward P/E is 25.79:

- Another way to look at this: the forward earnings yield is 3.88%. Both on a trailing and expectations level, this number has historically been closer to 4.84%

- Index level = $33.56 / 4.84% = 693.29

I would not buy stocks today.

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