Multiple Contraction Is a Bitch

For all of 2011, it looks like earnings for the S&P 500 will come in at $97.62. Of course, that involves some future estimates but since it’s not too far into the future, it will probably be very close.

Let’s compare this year’s earnings with 2007 when the S&P 500 earned $82.54. Yesterday, the S&P 500 closed at 1,209.88. Yet on the exact same data four years ago, the index was at 1,500.63. Higher earnings, lower prices.

Normally, earnings multiples are inversely related to bond yields. But the 30-year Treasury has dropped from 4.69% four years ago to 3.17% today. The three-month Treasury bill has dropped from 3.74% to 0.02%.

Posted by on October 20th, 2011 at 11:27 am


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