The forward 4-quarter estimate for the S&P 500 ended 2011 at $103.33 on December 30th, inline with the last few weeks and still stuck in the range we have been in since late July and early October’s peak near $107.
We’ve written about this before but i continue to be puzzled by the degree of “p/e compression” occurring in today’s market. Although we start to hear q4 ’11 results next week with Alcoa, the fact is S&P 500 earnings rose 14% - 15% in 2011, and yet the index finished flat on the year. Mathematically, if the denominator rises 15%, and your numerator remains flat, you get p/e compression, which is the same thing that happened in 2010. (Earnings up 30%, S&P 500 up 15%, etc.)
For 2012, current consensus estimates are for S&P 500 earnings to grow 9.9%, which would leave the S&P 500 at roughly 1,381 at 12/31/12.
The critical variable then is to try and figure out if the market p/e will expand or contract this year.
We are not making a forcast for 2012 - the 9.9% expected growth rate for S&P 500 earnings is our best guess at 2012. Interest rates dont nmatter as much as they did in the 1990′s in terms of their influence on market p/e, but i do think job creation and real estate prices will have an impact on the stock market this year. If we get decent +200k job growth for a few months in a row and real estate prices firm and start to turn positive (and by that i mean Case-Schiller), i think the S&P 500 p/e can start to expand.
At $103.33, the S&P 500 was trading at 12.2(x) forward earnings, for expected growth in 2012 of 9.9%, which to me is a stock market that has discounted a lot of risk, at least from a PEG standpoint.
The key ”forward 4-quarter” number comes this Friday, when we typically see the $3 - $4 increase as we roll into the new quarter. A break above $107 as we roll through earnings in January would be a positive for sure, and solidify the record high for corporate earnings, despite the S&P 500 still trading 15% below its previous peak.
We’ll be out with sector forecasts and sector detail next weekend, when we review the new estimate.
There is a lot of corporate bond issuance the next two weeks, so we are watching credit spreads too in terms of how all this issuance is received. High yield performed very well yesterday. We expect all of this corporate supply to get absorbed easily given teh liquidity and quality of corporate balance sheets today. We still think corportae high yield is a good bet for 2012, in terms of return and yield with protection against rising rates.
Long SPY, HYG, JNK, corporate high grade mutual funds,
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