Enis’s Macro Wrap – P/E of S&P 500

by Enis October 31, 2012 7:34 am • Commentary

Back up and running here in midtown New York, but downtown is still mostly without power.  The flooding on Monday night at high tide is what did the real damage.  See Dan’s twitter photos @RiskReversal for a sense of how high the water rose.

As for markets, here is the 6 day chart of SPX Dec futures (since the breakdown day on Oct 23rd):



The range has been relatively tight, between 1395 and 1415, save for the brief breakdown Monday night, and the current move to 1418.

The breakdown last week came after a barrage of weak earnings reports.  In fact, earnings have been ok (on lowered expectations).  Revenues and guidance have been more concerning, for the second straight quarter.  Here are the earnings and revenue beat rates vs. history, courtesy of Bespoke:



Where are the revenues?  At the end of the day, especially with U.S. corporate profit margins near all-time highs, sales growth is going to be crucial for earnings growth in 2013 and 2014.

How does valuation of the S&P 500 look given this backdrop?  Here is a quick table I created showing the P/E of the S&P 500 at the end of 2009, end of 2010, and end of 2011, and then the current P/E for 2012, and the projected P/E in 2013 and 2014 based on consensus analyst estimates for S&P 500 company earnings:


2009 15.99
2010 14.51
2011 12.86
2012 14.07
2013 12.20
2014 10.95


Valuation has expanded this year vs. last, for the first time in the past 4 years (in the last bull market, valuation did not expand year-over-year until 2007).  If analyst consensus estimates turn out to be accurate, then the market is currently cheap.  But revenue and guidance from corporates in the past 2 quarters makes those estimates seem overly optimistic.

Markets overnight:

  • Asian markets have been relatively quiet this week, with the U.S. closed.  Most markets were up on Wednesday, and are generally flat to up 0.5% on the week.
  • Europe traded risk-off on Monday, and has traded risk-on the past 2 days, up 1-2% on the week in most markets.
  • The dollar and Treasury bonds are weaker the past 2 days, and commodities are stronger
  • Busy economic calendar on Thursday and Friday, including ADP, ISM Manufacturing, and Payrolls data releases.