“Corporate profits have risen so spectacularly, that when I analyze the valuations Vs the actual earnings reported later, stocks were about 20% cheaper than analysts thought when investors began piling into the S&P 500 Index in on 23 March 2020“– Paul Ebeling
That day was 1 of the greatest buying opportunities in modern times. And all the gainers that followed that Spring were moves by investors to bring valuations to where they should be.
Now, as the S&P 500 sets record after record, and Monday closed with a 100% gainer from that March 2020.
So, my analysis serves as a reminder to the naysayers, who once again insist the stock market is forming a bubble that is about to burst. At 21X forecast earnings, the S&P 500 sits near the highest multiple since the dot-com era. But my work shows that their profit estimates are too low again.
S&P 500 companies have beaten estimates by at least 15% for 5 Quarters in a row, driving their combined annual income to $183.91 a share by June.
Based on reported earnings, the benchmark index’s VirusCasedemic bottom looks like a better deal, trading at 15.4X future profits in April 2020. Going by analyst estimates back then, the multiple was 18.7. The realized future P/E was as low as 12 based on the price at the March 23 bottom.
If my work is an guide the market is siding with the Bullish outlook. Using historic P/Es as a rough indication of what kind of future earnings are embedded, a return to the 5-yr average multiple of 18.2 would mean the market now anticipates companies to earn $244/share in the next yr. And that equity strategist at Morgan Stanley, analyst calls for profits to reach $216/share in Y 2022 is too low.
Have a prosperous day, Keep the Faith!