The Mkt. Is About To Plunge (Day 4, Vol. 3)
Are we enjoying the last weekend before reality returns to the stock market? Probably not. This bullish enthusiasm continues to surprise. However, the day when all the bullish lies are revealed to be empty and meaningless grows closer. For today's installment, let's discuss a fundamental--very fundamental--problem that bulls would prefer you don't discuss. Earnings. Or more correctly: WHAT EARNINGS? You really want me to believe that the S&P is going to rise when it is trading at a Forward P/E of 18? Are you trying to sell me land on Mars too?
The S&P500 as a group is projected to earn an average of ~$47 this year. The S&P is at 877. Thus 877/47 equals an elevated P/E. A historically normal P/E for the market is lower--in the nieghbourhood of 14. The bear market of 1932 bottomed at a P/E of 6! 6! Want to know where 6 takes us today? Actually, you don't, but I'll tell you anyway: 282. If we are to make a low equal to the great depression then stocks are due to drop 70% from where we are now. If stocks fall to a relatively moderate P/E such as, say, 10, then we get an S&P of 470.
However you run the numbers, there is no way to justify a valuation over about 600 as the market is already overpriced and expensive and earnings and dividend yields continue to fall without pause. If anything, the $47 estimate for the S&P earnings this year is too high, analysts have consistently slow in lowering expectations. All this said, I'd be shocked if the FINAL LOW of the S&P is above 600. 500 looks about right to me at this point, though obviously we'll have to see just how bad earnings and GDP shrinkage get before predicting an exact # of the bottom. However, no matter what the market is precisely worth, I can assure you without a doubt that the market is overpriced to a significant degree--something the CNBC crooners will never dare admit.
Look for the next part of this series tomorrow. As I mentioned earlier, I'll keep it going until it becomes clear to the (f)ools calling for a new bull market that this was just a long but irrelevant bear market rally.