Stock Market is Not Cheap!

From Big Picture: Earnings Estimate Fall
Have a look at these estimates for earnings in 2008. They started at $92 (early ‘07) and came down to $48:

On a trailing one-year basis, that puts the Price to Earnings Ratio (P/E) at over 19 as of today. This does not make the market cheap.

And what about 2009? Again, the analysts are in a race to find the bottom.

The current projections are for $42.26 for 2009. That makes the forward P/E 22. That doesn’t look like value at all, when the historical average is closer to 15.

In 2001, as-reported earnings were $24.67. Operating earnings in 2002 were $27.57. Does anyone think the current recession will be milder than the last one? Or shorter?

From Mish: Is the Stock Market Cheap?
For the last two months, we have heard round after round of bottom calls and a consistent message of "stocks are cheap". Some make the claim based on a comparison to treasuries. The reality is it makes no sense to compare stocks to treasuries. What does make sense is to discuss earnings estimates.

Think the stock market is cheap? Let's do the math. The S&P closed at 910. If those earnings estimates hold, the effective PE is 21.53. The historical average PE is about 15. At a PE of 15 the S&P would drop to 634. That is a huge drop of 30% from today's closing price.

What happens if the stock market over shoots as it typically does in bear markets. Assume a PE of 12. At 12, one might expect to see the S&P at 507. That would be an even bigger decline of 44% from here. If:

Earnings  PE  Target
$25.00   12   300
$35.00   12   420
$45.00   12   540
$55.00   12   660

$25.00   15   375
$35.00   15   525
$45.00   15   675
$55.00   15   825

$25.00   18   450
$35.00   18   630
$45.00   18   810
$55.00   18   990

Looking ahead to 2009, 2010, 2011 there is simply no driver for earnings like we saw in 2002. Enormous leverage, creative financing, and the housing bubble are all gone and are not coming back. The brokerage houses are now under bank rules and leverage will be reduced to 10-1 or possibly 12-1. A reduction in leverage is a reduction in risk, but also potential earnings.

In the immediate future, think about what increasing layoffs are going to do to credit card defaults, foreclosures, commercial real estate, demand for PCs, etc.

Then once the markets bottom, think about how fast those earnings will rise. Here's a hint: It will not be anything remotely like 2002.

Rushing in now on that expectation that stocks are cheap is playing the greater fool's game all over again. Stocks are not cheap, no matter how many pretend otherwise.