Posts filed under “Valuation”
At the beginning of 2007, the S&P500 was over 1,400, the Dow was just under 12,500, and the Nasdaq was about 2,500. Stocks, according to consensus estimates, were "cheap," and profit growth expected to be 10%+.
With 90% of earnings reported by the S&P500 firms, we now have enough data to see how the full calendar year was for profits.
Here’s the overview from S&P’s Sam Stovall:
At the end of 2006, S&P equity analysts expected operating earnings
per share (EPS) for the S&P Composite 1500 (comprised of the
S&P 500, MidCap 400 and SmallCap 600 indexes) to advance 10% in
2007, a healthy follow-up to the 15% gain seen in 2006.
Yet with 2007′s
results nearly final, we now find that EPS for the S&P 1500
actually sank by almost 4% on a worse-than-expected fallout from the
housing, subprime, and credit crises.
Within the S&P 1500, the S&P 500 index, which represents
88.5% of the market value of the 1500, likely registered a 4.2%
year-over-year decline, while the S&P MidCap 400 (7.8% of the 1500)
eked out a 0.1% gain, and the S&P SmallCap 600 (3.7% of the 1500)
The 1500′s negative earnings results for the year were the result of
deteriorating profit growth for the Consumer Discretionary and
Financials sectors in particular, as these sectors posted declines of
17.8% and 33.3%, respectively, as of Feb. 19, 2008. The second half of
last year was the toughest for the overall market, as it suffered
through EPS declines of 9% in the third quarter and 22% in the fourth,
a quarter that many dubbed the "kitchen-sink quarter" as companies
wrote down everything—including the proverbial fixture. (emphasis added)
The relative performance of the mid-caps was likely due to the presence of many energy, commodity and agricultural stocks. Indeed, a few sectors have done rather well: The exporting industrials, anything Ag or energy related, consumer staples, utilities have all thrived. Financials, anything house related, many retailers, consumer discretionary all performed poorly. I was a little surprised by the full year number, thinking the good sectors and the first half numbers might partially offset the second half.
What does this say about the market itself as a forecaster?
Short answer: The easy, glib readings — so favored by all too many ignorant media pundits — are all too often, wrong. Accurately interpreting the body language of Mr. Market is far more difficult and nuanced than the usual nonsense you hear peddled.
Here’s the amusing part: The same group of S&P equity analysts who foolishly were looking for a 10% advance in
2007, are now expecting a profits recovery in the second half of
2008. Their favorite sectors are (drum roll) Consumer Discretionary and Financials.
The thinking must be that the credit crunch will just go away, energy and food prices will drop, and the consumer will begin another wanton spending spree.
Hmmmm. I suspect this S&P profit forecast to be every bit as prescient as the previous one . . .
Earnings: A Clearer Picture Emerges
February 26, 2008, 7:44PM EST
One of the themes we have been hearing of late is that stocks, 10% off of their all time highs, are fully reflecting a recession.
That statement turns out to be, um, a tad less than accurate, as was shown by the most recent ISM non-manufacturing Index. Headlines such as Services Data Blindsides Market reveal how little the market actually had priced in even a mild recession, much less a deeper and longer one.
The ISM’s non-manufacturing
index reflects almost 90% of the economy, according to Bloomberg. Consensus expectations of 53% were dashed, as the index plummeted to ~41.0%. to the lowest level since October 2001. If we exclude 9/11, this was the weakest reading since the data began in 1997.
In response, all 10 industry groups in the S&P 500 declined, and the Dow dropped 220 points.
Across the board, the data released was surprisingly weak:
Business Activity Index at 41.9% (consistent with a recession historically)
New Orders Index at 43.5% (fell 10 pts)
Employment Index at 43.9% (An 8 point fall, matching the lowest on record).
Prices Paid remained elevated at 70.7
This is particularly surprising, as we recently learned from the WSJ OpEd pages that The U.S. Economy Is Fine (Really). I haven’t figured out why those pages insist on denying reality, but its their option to live in an alternative universe (Iraq has WMDs, economy is great, etc.)
There are lots of things that investors believe which I find perplexing. The Superbowl indicator is one, but the oddest to me is the so-called Fed Model, also known as the IBES Valuation Model. It is not that the Fed model is so terribly wrong — it has been both right and wrong over the…Read More