2018 Earnings Estimate = $147.98

I see that S&P has posted its first operating earnings estimate for 2018. The figure is $147.98. That’s adjusted to the index so the S&P 500 is currently going for about 15.5 times next year’s earnings estimate.

That estimate is almost certainly too high, and I expect to see it come down over the next two years. How far it will fall is still an open question.

Here’s a look at the S&P 500 (in black, left scale), along with its operating earnings (in blue, right scale). I’ve put the estimated part in red. The two lines are scaled at a ratio of 16-to-1. That means whenever the lines cross, the S&P 500 is going for 16 times earnings. Please note that I’m not saying 16 P/E is fair value. It’s just that the chart looks best that way.

You can see that the “earnings recession” of 2014-15 doesn’t appear to be that big even though it scared a lot of folks at the time. The stock market, rightly, wasn’t fazed. What’s interesting is that the estimates foresee a robust earnings recovery this year and next. In fact, the stock market has already priced much of that in.

If the stock market were to hit 16 times 2018 earnings (meaning, the black line meets the red line by year-end 2018), that’s growth of about 3% over nearly two years.

Posted by on February 6th, 2017 at 11:18 am

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