S&P 500 Earnings Estimates and Direction of the Market

We're now at the threshold of the Q4 earnings season. While we await the individual reports over the next several weeks, let's have a look at earnings forecasts for the S&P 500 index for 2011 and 2012.

One of my favorite sources of market data is the spreadsheet on the Standard & Poor's website maintained by Senior Index Analyst Howard Silverblatt (see my instructions at the bottom of this post for accessing the data).

The table below illustrates the forecast trailing twelve month (TTM) "As Reported" earnings estimates for the S&P 500. The values in the TTM Earnings column are the sums of the trailing four quarterly estimates from column D in Silverblatt's spreadsheet (as of 12/31/2010). The % Change column uses the TTM earnings estimate for through Q4 2010 as the baseline and shows quarterly earnings growth estimates through 2012.

Now let's look at the three forecast columns based on P/E ratios. Even if you're on a low-sodium diet, take these with a grain of salt. The middle of the three is calculated using a P/E of 15.5 — the historical average TTM P/E ratio for the S&P Composite over the past 139 years. I've multiplied the TTM earnings estimates by this number. Thus, the earnings forecasts using this ratio would put the S&P 500 at 1346 at the end of this year and 1395 at the end of 2012.

The rightmost column uses the TTM P/E at the end of 2010 (December's close of 1257.64 divided by the 74.57 estimate rounded to one decimal place). The earnings forecasts at this ratio would put the S&P 500 at 1468 at the end of this year and 1521 at the end of 2012.

The pink column is based on an arbitrary P/E ratio of 14.1 — the same distance below the average P/E as 16.9 is above it.

Of course, this is merely playful exercise with earnings estimates that will change. Moreover, as the history of P/E ratios suggest, the S&P 500 price oscillates wildly above and below the average P/E multiple.

I'll revisit the table above as the forecasts change, as they inevitably will, over the months ahead.

Disclosure: No position