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Interesting Reads on S&P Futures, Valuations

Posted on | October 27, 2008 Time: 8:06 pm |

The major U.S. indexes are holding their ground again today after another weak lead-in from Asian and European markets. S&P futures foretold another weak day as they had on Friday, but on both occasions the futures seemed to be looking backward rather than ahead. An interesting Bloomberg piece from earlier today puts some statistics behind just how unreliable the S&P futures have been this month.

Regardless of where your alarm clock goes off to start the day, the U.S. is the leadoff hitter in today’s global equity markets. The tone we have set in the past few days of overdelivering on very weak sentiment may begin to “stick” in some of the European & Asian markets later this week.

The big race for analysts & economists now is putting up an operating earnings estimate for the S&P 500 in 2009. We can all agree that the current consensus of $90-$94 is way too high, but how much of a decline in earnings should we realistically expect? 20%? 30%? The S&P had operating earnings of about $82 in 2007, and 2008 is tracking towards somewhere around $75, which puts a valuation of about 11.5 times on the S&P 500.

The WSJ had an interesting article up arguing that there could be more downside in the S&P because we’ve seen lower multiples in the past, mainly in the early 1970’s and in 1982, according to data from UBS. While I appreciate their point, those periods were also marked with extraordinarily high interest rates. The trough levels on the S&P 500 had to be lower to content with the the premiums found in the bond markets. With global interest rates currently at their lowest levels in decades (and falling), equity earnings yields are already comparable and switch to favorable with very small changes to interest rates.

As to my best guess on a 2009 number, my biggest fear is that the financial sector could once again trash the numbers for everyone in 2009. The huge write-downs amount to huge EPS losses, and will continue to skew the results from other sectors. So I will focus my attention more on the individual contributions each sector could make to S&P 500 earnings next year, and then model earnings based on the S&P ex-financials.

Ryan Barnes

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Category: Broad Markets, Fundamental Analysis, Investing Philosophy
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