S&P 500 Earnings & Valuation

Consensus expected S&P 500 estimates continued to fall for 2012 and 2013 during the week of January 27. They were down to $105.92 and $119.24, respectively, at the end of last month. Forward earnings--the time-weighted average of the two--has been remarkably flat around $107 since mid-August. The bull market from March 2009 through April 2011 was earnings led. Since then, the S&P 500’s volatile trading range reflected the volatility in the forward P/E. I believe that stock prices can move higher over the rest of this year along with the valuation multiple if investors anticipate that earnings growth will pick up in 2013.

I see three major risks for the bulls, which are discussed in our Morning Briefing today. In brief, the most immediate concern is that Greece won’t agree to the terms required by its troika of lenders (IMF, ECB, and EU) to reform its economy, triggering a default by Greece on March 20. Another risk is that push comes to shove in the Persian Gulf, sending oil prices soaring. Finally, given the strength of US employment, a spike in US bond yields could pose another threat for equity bulls. (More for subscribers.)