Quote:
Originally Posted by Zygote
earnings will probably fall to 45-60 bucks. p/e is likely to be around 10 leaning towards a little less for fair value IMO. would need to be less than 10 at least for me to consider them somewhat cheap given the lower expected earnings.
Not unless you expect years of deflation. S&P 500 earnings peaked at $85 in mid-07 and haven't been below $60 since the beginning of 05. They were last under $45 in 2003. The S&P earnings power has grown over time and is probably around where operating earnings are now.
Of course this doesn't mean earnings won't temporarily decline due to massive writedowns. But they already have, and when the writoffs end, earnings will snap back. In 2000-2002, earnings fell from $54 down to $25. 2 years later earnings were $50 again. 2 years after earnings hit their nadir in the great depression they doubled.
I think most of the writedowns are done, there are no more illusions about mortgage securities and balance sheets are being returned to normal. We may have to slog through another bad year as it is finished, but my bet is operating earnings are over $70 in 2010.