Earnings & Valuation Update

From Ed Yardeni:  "The S&P 500 forward earnings is at $119.29 per share and converging toward analysts’ consensus expectation for 2014, which has stabilized recently just under $123. 

S&P 500 revenues expectations are available through the first week of September. The bottom line is that forward revenues, which has been more volatile than forward earnings, rose to a new record high. I calculate that the forward profit margin rose to a new cyclical high of 10.3%, nearing the previous peak of 10.5% during the week of August 30, 2007."

One of the pillars of the market this year is that earnings have generally come in ahead of expectations.  Again we think this comes from a US economy that has continued to improve and corporations that are able to continiously squeeze higher profits from their revenues.  We've discussed for awhile that we might revise our earnings estimates and today we're going to follow through with that threat.  Our previous year end 2013 earnings estimate range or cone of probability for the S&P 500 was $104-108 with a 106.50 midpoint range.  We're going to move that range up slightly to $105.50-110 and we'll up that midpoint target to 107.75.  2014 S&P 500 earnings estimates will be upped to $113-117 per share and a midpoint target of $114.75.

Using these estimates we find that the S&P 500 trades with a 15.85 PE on our 2013 midpoint estimate and in a current PE range of 16.13-15.50. The S&P 500 currently carries an earnings yield of 6.3% on our 2013 midpoint.  

Using next years estimates we find that the S&P 500 trades with a 14.85 PE on our 2014 midpoint estimate and a current PE range of 15-14.57.  The S&P 500 currently carries an earnings yield of 6.7%.

Using the S&P 500 forward earnings supplied by Dr. Yardeni finds that the S&P 500 currently trades with a 14.29 PE for 2013 and an earnings yield of 6.9%.  The 2014 PE is roughly 13.86 and an earnings yield of 7.2%.

Analysts estimates are more aggressive than mind and we'll have to see how the next year pans out.  The key to who is more correct will be whether the economy continues to grow at something north of a 2% rate and whether corporate profit margins can be sustained.  My numbers imply a market that could trade between 1750-1900 by the end of 2014.  Consensus estimates describe a market that could trade between 1750-1975 by the end of 2014.  

Please note that analysts start out optimistic during the year and gradually move estimates lower and while I am showing you what my numbers imply there is no guarantee that any of these estimates or cones of probability will be reached.

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

Link:  Yardeni:  Forward Earnings Still Headed Higher.