Earnings Are Crashing
Carl Swenlin
February 14, 2009
The real P/E for the S&P 500 is based on "as reported" or GAAP earnings (calculated using Generally Accepted Accounting Principals), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued). Market cheerleaders invariably use "pro forma" or "operating earnings," which exclude some expenses and are deceptively optimistic. They are useless and should be ignored. The following are the most recently reported and projected twelve-month trailing (TMT) earnings and price/earnings ratios (P/Es) according to Standard and Poors. I have highlighted GAAP earnings. Note that projected earnings for 2009 Q2 are $15.90. Keep in mind that the last earnings peak of $84.92 was for 2007 Q3. That's a drop of over 80%!
Based upon projected GAAP earnings the following would be the approximate S&P 500 values at the cardinal points of the normal historical value range. They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20. I have highlighted the overvalued values. The charts on our website are still based upon 2008 Q3, which is wildly optimistic compared to 2008 Q4 earnings, which are still being reported (85% completed) and won't be completed until the end of this month. Note that the S&P would have to drop to 554 just to be overvalued based on 2008 Q4 earnings projections. The outlook by 2009 Q2 is much worse.
Of course, the market doesn't always follow these projections, but they are reasonable targets based upon the best fundamental estimates we have available.
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Taking a quick look at the stock market, we see it is still going nowhere -- Arthur Hill recently observed that the market has gone nowhere since October. Since we are in a 6-month period of positive seasonality, that is not very encouraging.
I had interpreted the price action following the January top as the start of the next down leg, but the movement of the last two weeks has kept the price index inside the months-old triangle formation, ending the decline for the time being.
Bottom Line: Market fundamentals are abysmal. The current estimated quarterly earnings for the S&P for 2008 Q4 is -$10.44. The S&P has never in history reported negative earnings for a quarter. Market action is neutral. This could be interpreted as "the market waiting for passage of the stimulus package"; however, there is no way to keep the stimulus package from passing, so it is likely to be a case of "sell on the news".
In my opinion, the bear market is far from over. Whether or not there is a substantial rally, I believe there is another 50% decline coming. That would be a downside target of about 350 on the S&P.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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