The Earnings Conundrum

Earnings are a conundrum for analysts right now.  Specifically S&P 500 earnings estimates are all over the board for 2013.  The bearish camp will point to peak margins, slow economic growth plus the headwinds of the most recent tax increases and higher energy costs.  This camp puts S&P 500 earnings growth in the $98-103 range.  If they are correct then the market is likely fairly valued right now as it currently trades in a PE range between 14 and 16 times 2013 on those types of earnings estimates. 

The bullish camp sees an expanding economy in the 2nd half.  At worst it will argue that even if earnings aren't as robust this year that markets will look ahead into a stronger 2014 and assign a higher multiple on stocks.  They see earnings this year in the 108-112 range.  If they are correct then stocks currently trade in a PE range of 13-14 for this year.

My current analysis has an earnings probability cone between $104 and $108 for 2013 and I am currently using a 106.50 midpoint.   Using that 106.50 as a starting point, stocks currently trade with a 14.20 PE and an earnings yield of 7.0%.  This is not as cheap as stocks have traded at other points since this bull market started back in March of 2009 but it is also not expensive.  It is certainly not expensive on a historical basis and is particularly cheap when one considers a 7% earnings yield in an environment where 10 year treasuries yield less than 2%.

A stock market that would give my earnings estimate a 15 PE by the end of the year {which is basically where we currently trade on a trailing earnings basis} would see the S&P 500 trading around 1600 by year end.  Today using last night's close of 1515, we see stocks trading at a bit over a 5% discount from that potential target.

Stocks have currently worked off some of their overbought condition but not all of it.

By the way here's why I place such a heavy emphasis on S&P 500 earnings.  From Business Insider I find this quote from Dan Greenhaus:

While there is no doubt that Fed support has been a crucial, crucial support mechanism for higher equity values and economic improvement since first being utilized in late 2008, one cannot ignore (nor, admittedly, separate out) the improvement in the earnings environment. Our good friend Larry Kudlow is fond of saying that profits are the mother’s milk of stock prices. In that regard, the S&P 500’s four quarter trailing EPS is currently $98 or so. At the end of March 2009, that number was $43 or so meaning EPS has more than doubled, 129% higher today than at the equity market’s bottom. Guess how much the S&P 500 is up since then? 128%. We suppose this isn’t all about the Federal Reserve after all.

{Read more: http://www.businessinsider.com/corporate-profits-vs-sp-500-gains-since-the-march-2009-bottom-2013-2#ixzz2MCjT8PSj}

S&P 500 earnings are looking for 2012 to come in the 102.50 to 104 range.  {I was at 103.50-103. 75}.  Should those numbers hold up and my 106.50 number be closer to the real earnings report for 2013 then earnings would increase only about 3% this year which would be the slowest growth since this bull market began.    Time will tell whether the bulls or bears are right.  So far 2013 has been a win for the bulls.

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