The flip side of earnings is valuation — and that is the main problem here:
There are hints lately that the economy’s collapse isn’t quite as precipitous as it once was, which suggests the worst may be over for corporate profits, too. That doesn’t mean they are anywhere close to normal.
Since World War II, earnings have grown at about 6% a year, slightly trailing economic growth. But earnings have fallen well off trend during the current recession.
“As-reported” earnings per share — which, unlike “operating” EPS, conform to accounting standards — of companies in the S&P 500 are on pace to total just $28.75 for the past four quarters, according to Standard & Poor’s. That is roughly 61% below where they would be had they maintained a 6% growth rate in recent years, estimates Vitaliy Katsenelson, head of research at Investment Management Associates in Denver.
Slap a 15 multiple on that, and you end up with a very ugly S&P500 number . . .
Profits’ Return to Normalcy Seems Far Off
AHEAD OF THE TAPE
WSJ, FEBRUARY 13, 2009
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