Highlighted stocks include Sempra Energy (
SRE), Allegheny Energy, inc. (
AYE), The Hershey Company (
HSY), Exxon Mobil Corp. (
XOM) and Energy Transfer Partners, L.P. (
ETP).
Given where the bottom-up analyst forecasts are for the S&P 500 -- currently at about $62.50 for 2009 -- and the rate of decline of the forecasts, it seems likely that the eventual actual earnings for the S&P 500 will be about $50. This refers to operating earnings, excluding one time charges and gains.
There will be far more charges than gains, so the level of reported earnings will be well south of $50. We will most likely see a bit of an economic recovery in 2010, but it will be anemic. As with 2009, the bottom-up forecast is both far too optimistic and falling fast. It currently stands at $78.34.? Based on a much longer time frame, and the current rate of descent, I think the final number for 2010 will be somewhere around $60.
The question then becomes: What sort of multiple do you put on those earnings? The secular growth rate of corporate earnings will probably be lower going forward than it has been in the past. Consumers will have to save more. Their retirements can no longer be funded by the equity in their houses, and their 401-Ks are at best more like 201-Ks.
The same is true for the college savings accounts. This will be a long-term process, and will be a serious drag on growth and with it corporate profits. With lower growth should come a low multiple.
On the other hand, interest rates are very low, provided you happen to be a gold-plated credit like the U.S. Government (not quite as low if you are a mere mortal). Still, low interest rates are usually associated with high P/E multiples in the stock market.
On a related note, inflation is also very low, also something associated with high multiples. However, just because historically 2% inflation was associated with higher P/E multiples than 4%, which was in turn associated with better multiples than 6% inflation, does not mean that deflation of 2% is good for the market. We simply do not have a lot of experience with negative inflation to know.
All things considered, I think that we will probably get down to about a P/E ratio of 12 based on this year's earnings. That would put the market at 600, or about 12% down from here.
