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.