Earnings forecast back below 100! That didn’t last long. Just a month ago, S&P forecasted earnings to bust $100.00 on a trailing twelve month basis by March of 12 and remain over $100 for the rest of 2012. But, the latest estimates shave about 3% off the forecast and remain below the triple digit marker yet again.
Almost the start of new earnings season and with the final report for S&P 500 earnings submitted – the following table illustrates Fair Market Value using frames (full report available from http://www.scribd.com/doc/59246203/CFMV-Q1-11-Final):
This quarterly earnings study uses both nominal and CPI adjusted data (popularised by Professor Robert Shiller). A primer on the study is available here (http://www.businessinsider.com.au/will-the-real-sp-500-fair-value-please-stand-up-2010-11). As one can determine from the table, regardless of time horizon for investors, the S&P 500 remains overvalued. When viewing the chart below – readers can clearly see that the S&P 500 will ALWAYS return to a fair value (and can remain undervalued for a period of time):
A frequent question arises concerning “Normalized Earnings” for companies within the S&P 500. To illustrate how UN-NORMAL earnings have been in the last 15 years, I devised two charts that simply show the slope of regression for two time periods. The first chart below displays the price to earnings (for many time frames) from the table above – 1871 until 1995; note the slope of the regression line – relatively shallow:
When comparing the chart above to the chart below, one can see the impact that the last 15 years of earnings had upon the slope of the regression line:
The takeaway from these two charts belongs to the reader. Will earnings continue the pace of the last 15 years or moderate back toward the previous 120+ year history? Perhaps reflecting on the nature of earnings and the influence of financial innovation through securitization products (and the current state of those), combined with rapid global governmental debt (that will be repaid or defaulted upon) will provide the insight necessary to help forecast the future trajectory of earnings.