TW: I posted yesterday on how one might want to be cautious grabbing the potential falling knife known as our stock market. The piece focused on the rapidly declining earnings estimates for 2009 (and likely beyond).
http://treylaura.blogspot.com/2009/01/for-you-knife-grabbers.html
Today I add a little more meat (courtesy of Mish's blog) with some numbers outlining valuations if the earnings come in even lower. Why would earnings get down to $25 for the S&P, that is where they were during the very mild recession in 2001. As you know P/E ratios tend to converge around 15ish over time. So while this is merely a simple math exercise, one can see some pretty tough numbers unless earnings stage a miraculous rebound or P/E ratios skyrocket (out of speculative fever or expectations of a massive earnings rebound in 2010 and beyond).
I do not look at those numbers and think a 300 S&P is imminent but I do look at them and understand just to keep the market flat will require either significant multiple expansion (in a severe recessionary environment) or fairly unbelievable earnings performance. On the other hand if multiple remains flat to even slightly more bearish and earnings continue to drift down then there is another 20% drop coming at least.
S&P Earnings/PE ratio/Value of S&P
$25.00/12/300
$35.00/12/420
$45.00/12/540
$55.00/12/660
$25.00/15/375
$35.00/15/525
$45.00/15/675
$55.00/15/825
$25.00/18/450
$35.00/18/630
$45.00/18/810
$55.00/18/990
Actual 2008 SP earnings will be roughly $45-50. Where would earnings growth come from in 2009?
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