The S&P 500 May Be Cheap And On Its Way To 3,200

The S&P 500 May Be Cheap and On Its Way To 3,200

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Stocks continue to perform well and have mounted a sizeable come back since the December lows. At this point the S&P 500 is less than 5% off its all-time highs, will the NASDAQ and the Russell are roughly 6 and 8% off their tops. It is yet to be seen if the indexes can manage to reclaim their earlier highs. Despite earnings estimates declining they still point to positive growth for 2019 and 2020.

S&P 500 earnings forecasts

Fourth Quarter

The fourth quarter has turned out to be one of the worst in some time. With 96% of companies having reported results, 68% of them have beaten, while 25% have missed, and only 7% met.The last time we saw results this bad was in the fourth quarter of 2016 when 67% of companies beat estimates and 22% missed, while 11% met.

(Data from Dow Jones S&P)

Earnings Continue To Fall

As a result earnings for 2018 and 2019 continue to drop, to $151.60 and $166.06, respectively. Additionally, the outlook for 2020 has fallen some too, to around $187.40.

(Data from Dow Jones S&P)

Below Norm Multiple

But the hint of good news here is that the S&P 500 is still trading at less than 15 times 2020 earnings estimates. The next chart below shows how the PE ratio versus 2020 estimates is well below the historical norm of the past two years.

(Data from Dow Jones S&P)

In fact, in 2017 the S&P 500 averaged a one-year forward PE ratio of 17.1 times 2018 estimates. In 2018 the S&P 500 averaged a one-year forward PE ratio of 17 times 2019 earnings. This year the average is just 14.2

(Data from Dow Jones S&P)

Assuming the S&P 500 reaches its historical multiple of about 17 times 2020 earnings estimates the S&P 500 could rise to roughly 3,186.

If we assume earnings estimates for 2020 falls by 10% from their current levels, it will send the forecasts down to $168.66 per share leaving the S&P 500 trading at 16.6 currently.

At the very least, we could probably assume at this point that the S&P 500 is at worse fairly valued, and should the earnings outlook for next year stabilize, then one could argue that stocks are very cheap.

Disclaimer: This article is my opinion and expresses my views. Those views can change at a moment's notice when the market changes. I am not right all the time and I do not expect to be. I ...

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