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 [6]). 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...
[7]
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.
[8]
which extends a longer-term reversion to reality trend...
[9]
which leaves Cyclically Adjusted S&P 500 P/E Ratios notably expensive to longer-term averages...
[10]
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