2015 S&P 500 Earnings Estimate = $137

Here’s a look at the S&P 500 (black line, left scale) along with its earnings (yellow line, right scale). The two lines are scaled at a ratio of 16-to-1 so whenever the lines cross, the market’s P/E Ratio is exactly 16.

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The future part of the earnings line is the consensus estimate from Wall Street analysts. I’m not a terribly big fan of estimates from Wall Street and this chart shows why.

As you can see, the yellow line becomes improbably straight in the future. As a bottom, what analysts do is take the existing trend and assume it continues into the future. That’s not necessarily a dangerous assumption, but it’s also important not to take these predictions too seriously.

The finals numbers for 2013 are in and it appears as if the S&P 500 earned $107. Wall Street currently expects earnings of $121 for 2014 and $137 for 2015. I strongly suspect that the 2015 estimate is too high and will gradually come down over the next two years. By the way, for the S&P 500 to reach 16 times 2015’s earnings, it would have to be at 2,200, which is a 20% jump from here.

Posted by on February 16th, 2014 at 6:02 pm


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