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Posted by: David Henry on June 12
If there’s a time for greed in the financial markets, this isn’t it. The spring rallies of relief over dodging depression have probably carried stock and credit markets about as high as they should go for a quite a while. Any greater gains would be tenuous until the economy gets out from under more of the debts taken on by consumers, home owners, buyout firms and commercial real estate developers. Better to let be the flat line that the S&P 500 is charting this month.
One reason to let the flat line be is that stock prices are already counting in a 70% rebound in earnings for S&P 500 companies, according to calculations by Barry Knapp, portfolio strategist at Barclays Capital. He doesn’t see how that’s realistic. The historical average earnings rebound is 20% and the highest was 47%. Knapp believes the market is correct in seeing the end of the recession, this find this enthusiasm just too much.
For perspective, the earnings that Knapp sees the market pricing amount to $75 per S&P share. That compares with a low for this cycle of $43.03 in the 12 months through March, according to Standard & Poor’s. It is also a lot higher than the $50 median estimate from 10 stock strategists surveyed by Bloomberg. The record high was $91.47 in the 12 months through June 2007. That high was inflated by banks and brokerages counting ephemeral profits in the credit bubble. Average earnings for the past 10 years, including the bubble years, were $70.49. In short, the reality of $75 of earnings looks quite a ways out in the future.
This doesn’t mean that the stock market is poised to fall. It does, however, suggest it is time to be patient and let the recovery to take hold before cheering stocks recklessly higher and risking another plunge. Of course, patience doesn’t come so easily when there’s a big hole in your retirement plan. Stock portfolios are still 40% short of their October 2007 values.
BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.