Our Blue Angels analysis of the S&P 500 shows that its forward P/E rebounded from a recent low of 12.1 on November 15 to 12.7 yesterday. In the Santa rally scenario, it should soon retest 13, which has been an unlucky number since early 2010. The market had three nasty corrections since then after failing to rise above this valuation level.
The fourth assault on 13 could be the charm. If so, then the valuation multiple could rise quickly to 14, a level not seen since early 2010, just before Greece hit the fan. S&P 500 forward earnings edged back up to $112.77 per share during the week of December 13, just a nickel below its recent record high. A 14 multiple on that number would put the S&P 500 up to 1579, slightly above the previous record high.
The S&P 500 forward P/E is highly correlated with the Citigroup Economic Surprise Index and with the CRB metals spot price index. That’s not surprising since investors are more likely to pay higher valuation multiples for earnings when they have more confidence in the economy. Both the surprise and the metals indexes have firmed up in recent weeks.
Today's Morning Briefing: Santa. (1) Looking up. (2) Nice round numbers: 1465 then 1565. (3) Barack, John, and Nick. (4) The rich will get richer. (5) Fiscal deal taking shape. (6) Devil is in the details. (7) Room for higher valuation multiple. (8) Analysts too optimistic about earnings in 2013 and 2014. (9) But there’s room for improvement. (10) Picking the leaders and laggards of 2013. (More for subscribers.)