S&P @ 1700x P/E next Quarter. FACT

Going through the stats for Q1 earnings, things look pretty good. Of the 470 S&P 500 companies that have reported so far, 315 have beaten, that’s 67%, which if you were from the Administration, you would probably round up to 70%. Actually ¾ sounds better, let’s say 75%. See {BBEA9 } on Bloomberg and have a look around.

Anyway, whichever number you take, it is a high percentage of companies beating. I was chatting with someone yesterday who said they were reassured by the market’s reaction to a positive set of Q1 earnings. You could now see companies beat, and the stock would rise. A modicum of sanity had returned to the markets. These numbers were in general bad of course but less bad than estimates. In fact, DB’s credit strategy guru, Jim Reid, presented a great stat the other day…If Q2 US earnings come in as analysts expect then by mid-year, the trailing 12-month earnings for the S&P 500 will be a derisory 0.52c per share, the lowest on a nominal basis since the 12 months to December 1934 (0.49c/share). Back then, the S&P traded at 9.50 vs the say 910 it is trading at the moment. So if analysts’ estimates hold, come H2 09, the 12 month trailing P/E will be circa 1700x!! Much of this is due to a shocking Q4 with massive write downs etc (-$23.25) so it clearly isn’t something we can extrapolate.

Reid

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Nevertheless, it got me to penning a few thoughts about the Q1s we’ve just had. Firstly, I disagree with the above mentioned opinion that stocks are behaving the way they should post numbers. I think given the current market roar we’re experiencing, companies could drop a real stinker and still go up. Hell, I bet a company could've even come out and said they needed $34bn in extra capital when their market cap was only $65bn…and still go up.

Secondly, you can’t extrapolate these Q1 earnings. The banks have had a super quarter for sure, taking in fat lending spreads and seeing huge amounts of debt and equity issuance. However, and I’m going to generalise here, while companies have beaten at the net level, I just don’t think that’s an accurate reflection of business. Companies are cutting costs like it’s going out of fashion. This is by definition unsustainable. I’m interested in seeing what the actual stats are for revenue beats. I don’t have them off hand but I’d bet my bottom $ that they weren’t anything like the EPS beats. And, as is well known but oft ignored (these days at least), EPS beats aren’t a fair reflection of the operational business if the beat is coming from one offs. So the issue becomes whether or not the revenue line picks up enough in Q2 to compensate for the decreasing GAMMA of the cost cutting. If not, then things could get ugly.