The S&P 500 and Earnings

Here’s a look at the S&P 500 (black line, left scale) along with its earnings (yellow line, right scale). The two lines are scaled at a ratio of 16-to-1 which means that whenever the lines cross, the market’s P/E Ratio is exactly 16.

We’re at a crossroads right now in the market. Earnings are going to be flat this earnings season but they’re expected to be flat. Wall Street currently expects earnings and the economy to reaccelerate later this year (note the upturn in the yellow line). The market, however, is a doubter. Actually, right about now is the trough in earnings growth.

If analysts are right and earnings start growing again, the market right now is very cheap. Under a reacceleration scenario, I think the S&P 500 could easily hit 1,500.

But if traders are picking up something not yet seen in the data, and the economy drops sharply, stocks could drop even further.

Posted by on July 16th, 2012 at 10:44 am

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