On October 9, 2007, the Dow Jones Industrial Average closed at
14,165. That would be the index's all-time high for more than 5
years. Then yesterday (March 5), the Dow finally closed above
this level to reach a new all-time high. And the S&P 500 is
knocking on the door of new highs as well. It's within 1.5% of
its all-time closing level of 1,565.
But stock prices aren't the only things near all-time highs.
So are corporate earnings.
Take a look at this chart of the "EPS" for the S&P 500 and
its trailing P/E ratio:
While the S&P is roughly at the same level it was in
October 2007, trailing EPS is about 9% higher:
Q4 2007: Trailing 4-quarter EPS on S&P: $89.31
Q1 2013: Trailing 4-quarter EPS on S&P: $96.99
That would put 2007's trailing P/E at 17.5, compared to 15.9
today. However, it's not
earnings that the market cares about. It's future earnings. And
that's what has me a bit worried.
According to Standard & Poor's, analysts expect 2013
S&P earnings of $111.21 (representing 15% annual growth) and
2014 EPS of $125.15 (13% annual growth). But I think these
estimates are way too high, particularly for 2014. For that kind
of growth to occur, profit margins would have to expand even
further from here. And you can clearly see in the chart above
that earnings have started to decline slightly over the last
couple of quarters. Perhaps this trend will reverse and earnings
will jump more than 25% higher from here in just 2 years. But I
Take a look at the chart below of the annual percentage change
in S&P trailing 4-quarter earnings going back to 1989. You
can see a huge deceleration in growth over the last few quarters.
The big question is: will earnings growth reignite like analysts
expect it to?
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