Third Time's a Charm?

Chart via "The Big Picture" blog and from JP. Morgan Funds showing the compression of the S&P 500's price multiple over the past decade or so.  I know we're  not there yet but we're close enough now to have the discussion on PE {Price to Earnings} multiple compression.  This is the third time we've knocked on new highs over the past dozen or so years. The mid-1500s on the S&P 500 has proved to be a very formidable barrier during this time.  The difference as we approach this level again today versus the past two periods is the market's multiple.  

Back in March of 1999 when stocks first reached these highs, the markets carried a PE multiple over 25 times the S&P 500's earnings.  What's not shown on the chart is the Earnings Yield {again the inverse of the PE} which was around 2.5%!  In 2007 the PE was a bit over 15 times earnings and the earnings yield was about 5%.  In both of these periods interest rates were considerably higher than they are today.  By comparison, today stocks carry a PE a bit under 13 and an earnings yield over 7%. 

As an aside of stocks would carry a PE today similar to where they were back in 2007 then the market would be worth 1550-1575 on 2012 earnings.  You are starting to see S&P 500 earnings estimates now for 2013  from Wall Street analysts.  Right now those fall in a range between $111-114 per share earnings.  I think these are too high and have been using a preliminary earnings range next year between 104-108.  Mid-pointing Wall Street's estimates for stocks next year the market could conceivably carry a price range between 1460-1700.  Using my price range stocks are worth next year 1390-1600.  We'll refine this more at a later date but wanted to throw some preliminary numbers out there for 2013.  Not saying we're going to get there as there's too much time and too many events that need to pass between now and then.  Just throwing out there for the good of the Corp what those numbers could mean.

*Long ETFs related to the S&P 500 in client and personal accounts.