For Valuations, You Need to Look Forward

David Rosenberg writes in the Financial Times:

An unprecedented eight-point price/earnings multiple expansion during a six-month faith-based rally has left the market at its most expensive (26 times operating profit, 180 times reported profit) in seven years. On a reported basis, this market is nearly four times overvalued, as it was during the tech bubble!

The problem is Rosenberg is looking backward not forward. The S&P500’s earnings for the fourth quarter of last year were dismal. In fact, they weren’t even earnings, it was a slight loss. Once that weight is off the trailing four quarters, things will look much better.
The latest estimates say that the S&P 500’s operating earnings will hit $54 for 2009, and nearly $73 for 2010. A multiple of 15 gives the market a fair value of roughly 1100. Discounted back to today means the market is fairly accurately priced.
Of course, the underlying assumptions may be wrong, but I don’t see any current disconnect between today’s outlook and prices.

Posted by on September 24th, 2009 at 11:48 am


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