S&P 500 earnings in the tank

It’s been about a week since I posted an updated earnings report for the S&P 500, and there are a few new items.

By far the biggest item is that S&P is now recognizing that Q4 earnings – well, there aren’t any.  This will be the first quarter ever where the 500 companies (which make up the S&P 500) total earnings add up to a negative number.  Normal people call this a loss, but brilliant economists say “negative earnings” as a euphemism.  I guess they think it sounds better than saying losses.

The latest update from S&P (link opens an Excel spreadsheet) has this in the notes at the top:  As Reported earnings are negative for the quarter, with or without Financials. Previously, the financial sector was blamed for the losses, but they’ve finally realized that most everyone’s earnings are in the tank, and that aggregate earnings are non-existent – even when you exclude the financial sector.

They also say House cleaning should be massive enough to keep first half of ’09 clean of ‘items’, after that it depends on the economy.

The problem is that they’ve been saying this since Q4 of 2007.  Every time earnings are lower than expected the analysts have said “this is the kitchen sink quarter” meaning that they think the companies have cleaned house and reported every possible thing that could be bad.  And they’ve been wrong every quarter.

They’ve been wrong because the companies themselves don’t know the extent of their losses, because they don’t know how much more they’ll need to write down because the value of their assets (mainly various derivatives of mortgages) are still declining.

Another note that should give you pause is With 84.8% of the market value and 390 issues reported, operating earnings are -62% below Q4,’07.   So even excluding everything that they claim are one time losses (which show up in the as reported earnings) operating earnings are less than half of what they were the same time last year.

On Dec 31st, 2007, the S&P 500 closed at 1468.  Here’s a fun game to enable you to calculate an equivalent price (based on operating earnings) today.  Simply adjust the 1468 close last year by subtracting 62%.   1468 – (1468 x .62) = 557.97. It isn’t difficult.  Based on this, the S&P 500 should be in the neighborhood of 500 to 600 right now, but yet it closed Friday at 826.

In other words, the S&P 500 index still needs to drop another 260 points (about 30%) from the current level to be priced the same as last year.  I thought the indexes were too high last year, and I think they’re still too high.  We are not at the bottom of this bear market.

Look at the spreadsheet in the link above.  Look at cell H35 where it shows the current trailing P/E ratio.  It’s freaking 30!  Waaay too high.  Either earnings need to double or stock prices need to fall.  Which do you think is more likely in today’s environment?  I think stock prices will fall.  I don’t know when it will happen – but it will happen.

At least S&P has FINALLY lowered their insane $81 estimate for 2009 earnings – dropping it all the way to $32.  Even that’s a jump from the (estimated) $27 the S&P 500 earned on 08.  Just another reason that I think the market still has a ways to drop.

More fun with math – try calculating a P/E ratio for the Q4 earnings alone.  The math is really simple.  Take the closing price on December 31st and divide it by the as reported earnings.  Here’s the formula:  903/-10.44.   Don’t forget the minus sign!

What’s that you say?  You say it shows a negative number?  Weird ain’t it.  It’s never happened before.  If you want to play with the spreadsheet a bit, try this.  Divide the result you just got (-86.52) by 4.  That will give you a P/E ratio closer to numbers that you’re used to seeing, except it’s a negative number of course. -21.63 to be exact.  That’s the current (instant?) P/E ratio of the S&P 500.

Now try it for historic prices and earnings.  When I do this with the S&P spreadsheet going back to 1988, I get a wide range of numbers, with the lowest being 10.65 (in Q3 1988) and the highest being 73.32 in Q4 of 2002, and an average of 23.17.

The current number (-21.63) blows away the previous low.  There are no earnings right now – only losses.

I want to quote another comment from the spreadsheet: As Reported short-term P/E (column H) higher than the bleachers at Yankee Stadium.  And Talk of second half ‘turning the corner’ now second half / early Y2KX (2010)

In other words, prices are too high on a value basis right now, and the estimates for the economy to bottom out have been pushed off into late this year or next year.  They say the stock market is looking ahead 6 to 8 months.  Those who were hoping for a rebound in Q3 are going to be disappointed.

gk

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6 Responses

  1. Just some thoughts of the top of my head. Assuming the US gov’t actually succeeds in keeping the market “calm”, as they are trying with all their stimulus right and left. Further assuming that a calm market needs to settle down to a P/E ratio of around 15, before we can see the start of any solid growth again. This would lead to an equation stating :

    Government stimulus => Relatively calm market and inflation => Stock prices “float” or “hang” in mid-air.
    Stocks need to half in value => Government will inflate until CPI has doubled – which would drive market prices of everything to a double (excepts stocks that will remain hanging in “mid-air” until a stable state ground has been reached), which would then give a P/E value that is around 15.

    I know there are huge gaps in this line of thinking, and it is not meant as an analysis, just some general “food for thought”.

    // HPX

  2. Other than a few more companies having reported 4th quarter earnings and losses, the situation with the S&P 500 hasn’t changed since this was posted. I’ll post an update when Standard and Poors releases an update and/or changes their earnings projections again.

    Gary

  3. I was expecting an update to the S&P 500 earnings on their website tonight, but all the data is still from Feb 19th. I’ll post an update for this historic quarter of losses when they release more data.

  4. “operating earnings are -62% below Q4,’07. So even excluding everything that they claim are one time losses (which show up in the as reported earnings) operating earnings are less than half of what they were the same time last year.

    On Dec 31st, 2007, the S&P 500 closed at 1468. Here’s a fun game to enable you to calculate an equivalent price (based on operating earnings) today. Simply adjust the 1468 close last year by subtracting 62%. ”

    Your a genius! So if a biotech smallcap had 1mil operating profit in 2008, has no operating earnings for 2009 but a drug could come out in 2010 giving it operating profit that means that the stock price should be $0 because operating profit is down 100%, therefore the stock price should be $0. In addition, a bunch of one time non-recurring charges that are happening now won’t be happening in the future which also contributes to higher p/e ratios. The reported P/E ratio for S&P IS NOT NEGATIVE, there is just an estimate that is negative while other estimates are positive, most likely due to one time charges. Dividends are 4% right now. You have no idea what your talking about.

  5. You must be one of the people who have been buying stocks all the way down. Every quarter I’ve heard that “everything is out there” now, that “companies are throwing in the kitchen sink” in an attempt to get all the bad news out, clearing the way for great earnings going forward. It hasn’t happened for 5 straight quarters, and if you’ve been in a restaurant, shopping mall, or to a car dealer lately, you’ll realize that it isn’t getting any better. Earnings are still going down – and there were NO earnings for the S&P 500 as a whole during the 4th quarter. And dividends are being cut everywhere.

    I predict that earnings will also be negative for Q1 of 2009, and that this will be one of the worst years ever for earnings. If I’m right, stocks still have a long way to drop. If I’m wrong, I miss out on a few percent of gains. I’m staying out of the market – you are free to call a bottom here and jump in with both feet if you choose, but I’m not participating in a fantasy guessing game.

  6. […] finally released an update for the 4th quarter earnings today, and the news is even worse than the last update on February 15th – and keep in mind that this does NOT include the nuclear loss that AIG dropped on […]

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