As readers may or may not recall, one of the main arguments the bulls had in early 2008, a month after the recession had already begun (according to the NBER's retrospective conclusion over a year later) to justify that the S&P 500, which had recently hit all time highs of 1546, was not in a bubble is that the projected EPS for the following year, 2009, were 120, which meant the multiple was an oh so very cheap 12x. The same analysis with the even nearer, 2008, S&P EPS which at that point were expected to print just below 100, suggested the S&P at around 1500 was a "healthy" 15x multiple. Unfortunately as the events of 2008 showed, not only did the financial system nearly implode, but earnings, both actual and projected, cratered. The result is that the 2009 EPS which was initially forecast to be $120 ultimately ended up being half of that, or $60 (see chart below), which also meant that the forward multiple of a "very cheap" 12x or so ended up being, drumroll, just a tad bubbly 24x!
Which is why we urge anyone using the naive argument that stocks now are cheap based on forward multiples to observe the following chart, which shows that S&P 500 2013 EPS, projected to be just below 110, are now just above what the S&P was supposed to earn in early 2008 and well below the then projected 2009 EPS. Where it gets more amusing is that the current estimate for 2014 EPS is precisely where 2009 EPS were supposed to land.... before those particular earnings ended up being crushed in half.
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Finally as we will show in a subsequent post, 2013 EPS on a GAAP basis are currently precisely $100 with another $10.25 coming from adjustments and other write-offs. Which means that on a recurring Net Income basis, assuming Q4 earnings are roughly in line with expectations, the S&P 500 is currently trading at over 18x GAAP earnings, or as the same people who in 2008 said "the market is not in a bubble" would call it, "cheap."