Wednesday, August 15, 2007

Busy, But A Quickie

S&P 500 is now trading at 17 times earnings, a level some consider cheap. But a P/E ratio has not only a numerator, but also a divisor. What about those earnings, eh?

About 20% of S&P 500 by capitalization and 30% of earnings are made up by financial shares. Add the finance arms of industrial cos. like GE, GM and Ford and some 35-40% of all S&P 500 earnings are made up of purely financial activities. Not exactly happy times there, right now.

Now, do the math and calculate various forward P/E scenaria for the whole of S&P 500 if financial sector earnings drop by 25%, 50% and 100%. Then observe how far away we are from the 50 year P/E average of 16x. Hint: it ain't pretty.

8 comments:

Anonymous said...

Earnings are yesterday's news.... Someone please tell me something that I don't know.....

I keep hearing the same BS all around. It's not just the financial activities from corporations that's going to be hurting, it's all earnings in general. I anticipate a dramatic drop off in earnings as consumers capitulate. Equities are priced like Miami Condos.

Recesion is in the horizon and 90 miles an hour is the speed I drive.

Many thanks,

Econolicious

Anonymous said...

Interesting scenario. Which is a "correct" stock PE ratio in your opinion, taking into account the risk?

Best regards

John

miju said...

no PER for valuation in crisis : only P to book ! and a crashed market is at 1.5 to 2 PtB. A long way to go...
miju

Mover Mike said...

Couldn't agree more about "P to book", however there's a big need to be careful about stated BV. TMA just reduced BV by $5.10 per share, out of the blue!

Anonymous said...

The issue isn't just how far corporate earnings may drop. It's how long they will stay sluggish.

There are three big elephants that will march into the room in sequence over the next few years, and all will stomp away at corporate earnings...

Higher energy costs, good maybe for energy sector but bad for everyone else, especially manufacturing and consumer.

Higher taxes, especially on corporations.

Universal health care, bye-bye health care sector pricing power and earnings (in the U.S. at least).

I think there is one sector where earnings may hold up pretty well over the next 5-6 years, and that is tech. But it's relative to the rest and still not very good.

David said...

"Higher energy costs, good maybe for energy sector but bad for everyone else, especially manufacturing and consumer"....higher energy costs (if we're talking about oil) are good for railroads, since rail freight has about 3X the fuel efficiency of trucking. There are also probably some domestic manufacturing industries that would benefit from higher oil prices increasing the cost of air freight from foreign suppliers.

Anonymous said...

"Recesion is in the horizon and 90 miles an hour is the speed I drive."

That would clog some roads here in Portugal ... eheh

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