What's is the S&P 500's real price-to-earnings (P/E) ratio
Tune into one media outlet and they claim, "The S&P only has
a P/E of 16.2x".
Another money manager states the "P/E is 17.0x".
Still others suggest the P/E is currently at 17.8x.
What if I were to tell you all of these P/E's are
wrong and have never even existed?
Valuation Tricks and the Real P/E
In reality, the S&P 500 (NYSEARCA:SPY) would have a P/E of
16.2x if the expected 2014 operating earnings of $111/share comes
to fruition around February 2015. That's a very long 14 months from
now and the likelihood of earnings expectations remaining this
lofty based on recent history is slim to none (see graphic
Likewise, the stock market (NYSEARCA:SSO) will
only have a P/E of 17.0x if the expected 2014 reported
earnings target of $106/share is met around the same time in early
2015. In other words, estimates for the future.
Furthermore, the market has a P/E of 17.8x given the latest
quarter's actual earnings (finalized by December) but at
September's S&P price. When the S&P (SNP:^GSPC) was
at 1,682 at the end of the 3Q, earnings were still expected to come
in higher than they actually did, making the P/E actually
higher than expected then.
The real P/E today is currently 19.5x, based on actual earnings
through the 3Q 2013 reporting period and 12/27's S&P 500 price,
but what does it matter anyways?
Earnings haven't mattered for three years as the charts below
show. Earnings have been missing, quarter after quarter, yet
the market still goes higher, rising due to multiple expansion
instead of growing because of fundamentals. One must
question the validity of earnings to justify the current market
The first chart in the next graphic below was also
highlighted during the summer as a trend that was likely
to end. Also from Standard and Poor's, just as they were in
2012 and 2013, CEOs and analysts overestimated earnings, just long
enough to convince investors that P/E ratios would still be low, in
the mid-teens. 2014's earnings have now joined 2012 and 2013
by lowering guidance throughout the year.
If this continues and at current equity prices, by the time
mid-2014 arrives P/E ratios will be nearer the current 19x level
than the 16x level currently being promoted.
The mainstream media and talking heads like to play games when
it comes to stock market valuations. Distorting
reality gives a better view of market valuations. And
since most experts rely on ever higher stock prices to make
their livings, their biases keep the greater fool theory
In July I wrote an article suggesting you should ignore Wall
Street's earnings estimates and look solely at actual results
because basically Wall Street has no clue when it comes to
estimating them anyways.
Take a look at the first set of charts above, from Standard and
Poor's, which show the consensus earnings estimate histories of
2012 and Q4 2013 by analysts. These charts were first
highlighted in my July article entitled, "
Why you Should Ignore Wall Street's Earnings
" with the right graphic showing that 4Q 2013 has continued the
downward guidance trend, now 10% lower than was expected and sold
to the public last year.
What to Do?
If you bought equities because of earnings and expected profits to
grow into your P/E your strategy has not worked. Then again,
sometimes it's better to be lucky than good as the market has still
provided positive returns for you.
But how long will the market's disconnect with stagnant
fundamentals last? History suggests the markets move in
valuation cycles, often with very large swings.
Combining other indicators such as technicals and sentiment
along with the fundamentals can often give a better overall picture
of the markets, allowing you to focus on what really matters at
that point in time. This allows you to take advantage of the
strategies that are currently working and to be ready when the
trend does finally change.
Using some of these technical and sentiment indicators
helped us get long the homebuilders (NYSEARCA:XHB) 12/18 when we
suggested in our 12/16 ETF Profit Strategy Newsletter for traders
to buy ITB (NYSEARCA:ITB) when it was at $23.50. Already the
trade is up over 4%. Stops have been moved up to breakeven,
allowing investors to now play with the house's money.
Following earnings and fundamentals at a time when they
simply aren't important to the markets means other strategies
should be utilized. As earnings continue to disappoint, and
in the case of the homebuilders, data continues to be mixed, this
will only become more a necessity as other strategies continue to
provide results that more traditional methods do not.
Profit Strategy Newsletter
, which includes our Technical Forecast and Weekly ETF
Picks, uses technical, fundamental, and sentiment analysis to
be on the right side of the market.
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