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In Case Of Collapsing Earnings, Expand Multiples And Pray

Tyler Durden's picture





 

Both earnings and revenues for 2012 have been cut dramatically in the last three months, rejuvenating a sliding consensus trend for 2012 that began in the middle of last year. However, as we are told again and again, the economy must be doing fine because the market is up so much in that period. In fact, what is even more fun to hear is that the market is cheap (never mind the incredulous hockey-stick expectations for Q4 this year). In fact, the market is not cheap at all. The correlation between the S&P 500 in the last two years and the P/E multiple shows that performance has been driven almost entirely by multiple-expansion alone. Forward P/E is now getting close to recent peaks suggesting the market is far from cheap and on a longer-term view (based on both an as-reported and operating basis), the S&P 500 appears expensive - and perhaps these charts will re-anchor whatever cognitive bias that seems to pervade the long-only manager's herding mentality.

 

Equities have ripped and dipped all on the basis of multiple expansion and compression...

 

and recently even more so - as EPS and Sales have been cut significantly...

Third-quarter earnings of Standard & Poor's 500 companies are now expected to fall 0.1 percent from a year ago, a sharp revision from the July 1 forecast of 3.1 percent growth, Thomson Reuters data showed on Thursday.

 

That would be the first decline in earnings since the third quarter of 2009, the data showed.

 

 

which extends a longer-term reversion to reality trend...

 

which leaves Cyclically Adjusted S&P 500 P/E Ratios notably expensive to longer-term averages...

 

so the bottom line is that the S&P 500 is what it is - a nominally priced index of the state of the USA - and its valuation is driven by a multiple expansion that is justified by those that need to on the basis of hope - as opposed to the reality of declining earnings fundamentals...

 

Source: Goldman Sachs

 


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Thu, 07/26/2012 - 17:24 | Link to Comment JackT
JackT's picture

Earnings Schmernings...It's all about the QE

Thu, 07/26/2012 - 17:29 | Link to Comment fonzannoon
fonzannoon's picture

All the S&P is at this point, is a proxy for the future inflation the fed is going to create. Once they have decided they have seen enough deflation.

Thu, 07/26/2012 - 18:02 | Link to Comment The Monkey
The Monkey's picture

Shit, if the central banks go to town now, we will have one mother fucker of a giant top. It will be interesting to see what they do. At this point monetary policy looks increasingly like desparation.

Thu, 07/26/2012 - 21:34 | Link to Comment old naughty
old naughty's picture

as in any ponzi, stock can go higher still as earnings go to negative.

Thu, 07/26/2012 - 22:09 | Link to Comment wee-weed up
wee-weed up's picture

Trees do grow to the sky, bitches!

Fri, 07/27/2012 - 03:30 | Link to Comment AssFire
AssFire's picture

You didn't build those trees either, bitchez!

Thu, 07/26/2012 - 17:36 | Link to Comment Jlmadyson
Jlmadyson's picture

Recession /depression economics fully back on.

Oh yea love the latest headline out of Forbes:

Drugged by Draghi: Markets Rally After ECB Chief Promises To Save Euro.

Even the mainstream realizing this is one crack smoking infested party.

Mwhahahahaha!

Thu, 07/26/2012 - 17:32 | Link to Comment Meesohaawnee
Meesohaawnee's picture

or call mario..

Thu, 07/26/2012 - 17:34 | Link to Comment Row Well Number 41
Row Well Number 41's picture

Reality has no affect on the market at the moment, it decoupled from reality long ago.  When reality intrudes on this market it will be brutal.

 

#41

Thu, 07/26/2012 - 17:36 | Link to Comment buzzsaw99
buzzsaw99's picture

the Qs have a higher p/e and lower dividend yield making the nascraapl even crappier.

Thu, 07/26/2012 - 17:36 | Link to Comment Rainman
Rainman's picture

Cut the government debt juggernaut and cease MTM and we is goin to Greece !

Crime must continue to save the world !

Thu, 07/26/2012 - 17:36 | Link to Comment hedgeisforpussies
hedgeisforpussies's picture

stay long into fed/boe next week and go flat at about 1380-1390. if they disappoint next week sp 1000 in 3 weeks. 

Thu, 07/26/2012 - 17:42 | Link to Comment The Monkey
The Monkey's picture

Or, sit on the sidelines and wait for volatility to collapse as the central banks rush to provide portfolio insurance.

Thu, 07/26/2012 - 17:36 | Link to Comment hedgeisforpussies
hedgeisforpussies's picture

sorry not boe, ecb. 

Thu, 07/26/2012 - 17:52 | Link to Comment JustObserving
JustObserving's picture

Why pray when you have the PPT?  The PPT buys $1 billion in S&P options and the market moves up $100 billion.  Much simpler than QE or operation twist. The world is awed by the resilience of the US economy.  Besides, Bernanke can print $1 billion with a few keystrokes. The Fed will never be audited.

Thu, 07/26/2012 - 17:51 | Link to Comment bagehot99
bagehot99's picture

The King is in The Altogether......

If I were very rich indeed, I'd be in gold and Swiss debt, and probably not much else. This is going to end badly, soon.

We are reassured on a daily basis by supposedly serious people who either, a) cannot conduct basic arithmetic. or b) are lying their asses off and fully aware that this gargantuan global debt mountain simply cannot be repaid, and we need a near-catastrophic economic correction to rectify it.

I'm leaning toward a), based upon the idiocy our President spouts on an hourly basis.

Thu, 07/26/2012 - 17:56 | Link to Comment Jlmadyson
Jlmadyson's picture

I mean could this be timed any better?

Europe collapsing on an hourly basis.

Piss poor earnings.

8/10 economics stats down the drain.

US elections.

Debt ceiling.

Fiscal cliff.

Time to buckle up!

Thu, 07/26/2012 - 18:14 | Link to Comment The Monkey
The Monkey's picture

Don't get too comfortable. Central banks may fire the afterburners and try to get another 10,000 feet out of the top of the envelope.

Consider what the Fed did in 1927. We have enough data points to know they have engineered a situation from which there is no exit except that which the market imposes, and the market will play along until it can't. More action at this juncture means q2 earnings were just a bump in the road - a marker of a short-term bottom.

Thu, 07/26/2012 - 19:34 | Link to Comment Jlmadyson
Jlmadyson's picture

The printing will do nothing for the real economy at this point and ultimately that is why it has failed and will fail going forward. We are no where close to a real bottom in the economy.

Thu, 07/26/2012 - 18:04 | Link to Comment paul_Liu
paul_Liu's picture

who cares?

Market is going up and bears are losing...

Thu, 07/26/2012 - 18:49 | Link to Comment Reese Bobby
Reese Bobby's picture

I love you crazy kids!

Thu, 07/26/2012 - 19:31 | Link to Comment Jlmadyson
Jlmadyson's picture

Until it doesn't. Just like 08 but we are considerably deeper now.

Nothing they have done has worked and there is no getting around that. Why should we expect any different this time.

This is why they have to print. No where else to go.

Thu, 07/26/2012 - 18:07 | Link to Comment Getting Old Sucks
Getting Old Sucks's picture

I think they want everyone all in, in equities.  That way everyone goes broke when the bubble breaks.  Then they can inflate the hell out of things to leave all that hold government debt losers too.  If every one is not all in, then there's too much that will ride along with inflation when interset rates rise like back in the 80's.  ZIRP helps them sell there bonds cheap now and rob savers.  Savers are a problem if they don't get them to go all in.  Next they'll try NIRP.  In reality, they're in a catch 22.  Seniors are just trying to keep their money and, collectively, that's where the real money is.  Bennny, not going to work, SOB!

Thu, 07/26/2012 - 18:17 | Link to Comment fonzannoon
fonzannoon's picture

The dow is at 13fuckingthousand and the ten year is 1.fucking4

Those two data points together are just spectacular to stare at.

Thu, 07/26/2012 - 18:26 | Link to Comment Chartist
Chartist's picture

Bob Janjuah said SPX to 1400 - 1450 early August.....My own target is 1405 followed by a slide to 1050 by the end of Q1, 2013.

Thu, 07/26/2012 - 19:07 | Link to Comment The Monkey
The Monkey's picture

Janjuah has been wrong, a lot.

That said, enough policy action will move the needle. Buyers will pile in.

Thu, 07/26/2012 - 18:41 | Link to Comment Reese Bobby
Reese Bobby's picture

Stock action has gotten just plain weird and that is rarely a good sign.  I have this deja vu feeling...oh yeah, 2011 at this exact time of the year.  Beware the "fat finger."

Fri, 07/27/2012 - 00:01 | Link to Comment yogibear
yogibear's picture

Bernanke and the Fed will do anything to keep the market elevated.  Buying equities and treasuries  with digital money.

Reality comes only when confidence in the US and it's currency is lost.

Fri, 07/27/2012 - 03:22 | Link to Comment Hata Mari
Hata Mari's picture

Everything is greeeennnnnn!

 

Oops......

Fri, 07/27/2012 - 06:44 | Link to Comment orangegeek
orangegeek's picture

An SP500 weekly puts things into perspective.  Forecast isn't looking so good.

 

http://bullandbearmash.com/index/usd/daily/

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