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Can profits grow faster than the economy forever?

The answer is no, but profits can grow faster than the economy for some time and that’s pretty much what the market is expecting.

For 2009, the S&P 500 will make around $55 to $60 a share. For 2010, earnings will probably be around $75 a share. For 2011, and now it’s starting to become hard to forecast, Wall Street sees earnings at $92 a share.

If that’s correct, then the stock market is still pretty inexpensive. At 15 times earnings, $92 a share translates to 1380 for the index by the end of 2011. If we discount that by 8% to today (I get 8% by adding a 3% premium to 5% which is about where AAA corporates are), we get 1160. That’s more than 12% from where we are today.

Of course, this assumes that there will be no double dip. If that comes along, then all bets are off.

Posted by edelfenbein at October 5, 2009 12:10 PM