Taking A Simplistic High-Level Look at S&P 500 Earnings

Dec 10, 2012 in Earnings

The S&P 500 is expected to earn about $110-$112 in earnings in CY 2013.   With the S&P 500 cash index closing at 1,418 yesterday, the P/E is 12.7x.

In January, you can be sure to hear a lot about earnings and speculation on what will happen to that ~$111 figure.   It is probably too high given that is the norm.  That is,  estimates usually start high and then move down somewhat throughout the year.   That has not been bearish in the past -- that is the normal 'expected' result (there are many, many examples of the market doing well as earnings dropped). What is significant is if it falls sharply -- or rises even modestly-- those are not normal.

Recessions cause S&P earnings to drop sharply so that is of course the ultimate in concerns.   What is always interesting is for an earnings report from XYZ company to come out and then various commentators will try to extrapolate a forthcoming big disaster for the economy based on that result.   Those people have been consistently run over in this bull market.  

With that all in mind, here are some high level numbers to help keep it in perspective -- just the S&P 500 companies alone are projected right now to do about $1.04 trillion in net income (with a 't').   So that means that each $1 in S&P index earnings per share is about $9.3 billion in actual after-tax income dollars.   Next time you hear about some company that is going to drive the economy off a cliff, think about that statistic.   Is it so bad as to take -$93 billion off S&P aggregate earnings --- if it is, then that will cost the S&P -$10 of its ~$111.

Taken a step further, a recession might cause EPS to drop back well below $100. But to get from $112.00 down to say $90.00 (a -$22 per share) --- that works out to be about ~$202 billion less in net income.

That is quite a drop.   Wal-mart is projected to do about $18 billion in 2013 so we need the equivalent of 11 Wal-Marts to all simultaneously become profitless.  

We will have another profit downturn someday because we will have another recession someday -- but that is about all you can say as there is nothing right now that would indicate this is happening.  Indeed, financial sector earnings have actually increased over the last 90 days -- led by Bank of America, a company expected to do $11 billion of earnings in 2013 -- which is still down by about 50% vs expectations ~5 years ago.   Yes, tech earnings have weakened and energy has had a very poor earnings year -- so of course we will continue to pay attention to those developing situations.

Then again, you don't need any of that to happen just to have a market correction.   Be diligent and manage risk of course --- but keep this all in mind next time you hear how Caterpillar is taking its profit estimate down by $300 million for 2013 --- which is not even the equivalent of a nickel of the ~$111.00 S&P index earnings per share.   For S&P earnings to drop real materially,  you need a major sector to pretty much implode (like Tech in 2001 and Financials in 2008) ---  and then for a real doozie of a drawdown, you need the problem child sector to also drag others down with them into the abyss.   That is what causes the largest market drawdowns. 


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