Ominous Market P/E?
March 27, 2009 10:16 AM Subscribe
Can this possibly be right? [pdf]
The New York Federal Reserve is reporting that the S&P 500's P/E basically tripled in a week. I know markets have been up, but I haven't been hearing much about terrible earnings reports over the past few weeks. What gives?
The New York Federal Reserve is reporting that the S&P 500's P/E basically tripled in a week. I know markets have been up, but I haven't been hearing much about terrible earnings reports over the past few weeks. What gives?
Best answer: See here for quarterly sector-level earnings - It won't surprise too many people that the bulk of this is concentrated in the financials and, to a lesser extent, materials sectors.
posted by milkrate at 10:43 AM on March 27, 2009
posted by milkrate at 10:43 AM on March 27, 2009
Best answer: Yeah, that is seriously a WTF number. I found this article to be helpful, and here's a partial recap:
Equity markets are discounting machines; they generally anticipate economic turns 6-9 months before the actual turn. Corporate profits generally begin to improve only AFTER the economy has turned. It follows that equity markets generally begin to recover while economic news remain grim and well before profits even begin to stabilize...
At the extreme, and we are admittedly in an extreme period, a large company with a tiny market capitalization could incur losses so large as to wipe out most of the S&P 500 earnings (AIG lost over $60 billion last quarter alone). As a result, the Index PE would skyrocket even though the other 499 stocks’ valuation would actually not change at all. In effect, a casual or superficial observer looking at the Index would conclude that equities are expensive or overvalued when, in fact, 499 stocks would be cheap or undervalued.
With the release of its Q4 2008 results, AIG subtracted $5.13 to S&P 500 Index operating earnings and $7.10 to reported earnings in the December quarter. These losses will negatively impact the S&P 500 Index earnings throughout 2009. Yet, AIG is 0.02% of the S&P 500 Index so its market value has literally no meaning to the overall Index.
I am NOT trying to make a call to whether or not the S&P is over- or undervalued, just trying to expand the context in which this particular number can be viewed.
posted by malocchio at 11:28 AM on March 27, 2009
Equity markets are discounting machines; they generally anticipate economic turns 6-9 months before the actual turn. Corporate profits generally begin to improve only AFTER the economy has turned. It follows that equity markets generally begin to recover while economic news remain grim and well before profits even begin to stabilize...
At the extreme, and we are admittedly in an extreme period, a large company with a tiny market capitalization could incur losses so large as to wipe out most of the S&P 500 earnings (AIG lost over $60 billion last quarter alone). As a result, the Index PE would skyrocket even though the other 499 stocks’ valuation would actually not change at all. In effect, a casual or superficial observer looking at the Index would conclude that equities are expensive or overvalued when, in fact, 499 stocks would be cheap or undervalued.
With the release of its Q4 2008 results, AIG subtracted $5.13 to S&P 500 Index operating earnings and $7.10 to reported earnings in the December quarter. These losses will negatively impact the S&P 500 Index earnings throughout 2009. Yet, AIG is 0.02% of the S&P 500 Index so its market value has literally no meaning to the overall Index.
I am NOT trying to make a call to whether or not the S&P is over- or undervalued, just trying to expand the context in which this particular number can be viewed.
posted by malocchio at 11:28 AM on March 27, 2009
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posted by mrt at 10:30 AM on March 27, 2009