At the start of this year, many economists predicted that an economic crisis in Europe would grow larger, and Washington would be unable to develop a bipartisan consensus around a fix for our persistent budget deficits.
They were right on both counts.
Economists also expected corporate profits would stay strong and suggested a bit more upside for stocks as the year unfolded.
Right again.
The S&P 500 Index rose roughly 10% in the first four months of the year. By that time, the S&P 500 had doubled from its March 2009 low. Yet the market has largely been on a downward slope since the late April peak, and we'll likely finish the year in the red unless we get a Santa Claus rally.
What might deter such a rally? Well, we're starting to see some year-end profit warnings from a handful of companies in the S&P 500. Chemicals giant DuPont (NYSE: DD) slashed forth-quarter guidance and now expects to earn around $0.33 a share, a 25% reduction from prior guidance. Chip makers Altera (Nasdaq: ALTR), Texas Instruments (NYSE: TXN) and Intel (Nasdaq: INTC) have all reduced guidance as well, and if other companies decide to cut their outlooks in coming days, then it will be hard for stocks to move higher by year's end.
But what about 2012?
Well, the headline that was in place at the start of 2011 doesn't need to be rewritten. Europe and Washington will still struggle with major fiscal problems, and corporations will still be minting cash. They key difference you should keep in mind: the market now sports a slightly lower multiple than back in January, as profits have risen even higher and the major indexes are a bit lower. In fact, the S&P 500 is now trading at decade lows on a price-to-earnings (P/E) basis -- with the exception of that late 2008/early 2009 implosion.
Market strategists predict aggregated profit for all companies in the S&P 500 will rise from an expected $98 a share in 2011 to $108 a share in 2012, and rise by a similar 10% to $119 by 2013.
This means the S&P 500 trades at around 11.4 times projected 2012 profits. Stocks, on average, have traded for 15.9 times forward earnings during the past 30 years. The fact that interest rates are extremely low argues for an even higher multiple.