Crew Capital Management Thoughts on Investment

Welcome to the Crew Capital Management Thoughts on Investment blog. At Crew Capital, investment education is key to how we work with our clients. We hope our conversation and analysis entice you to think further on your investment strategies and planning. For further discussion, please contact us at rjung@crewcapital.com

Thank you!
Robert F. Jung, CFA CPA*

*CPA inactve

Thursday, October 9, 2008

Market Pricing for Big Earnings Decline

Are analyst estimates far too high? The market seems to be saying so. In the previous bear market of 2000-2002, the S&P 500 fell by nearly 50% from its peak and earnings ended up falling about the same degree from peak to trough. The S&P 500 is currently down about 35% from its peak of 1576 late last year. S&P 500 earnings peaked at an annualized rate of about $87.50 per share in the second quarter of 2007. A 35% decline from that peak implies earnings of about $57, well below the Street’s most bearish forecasts. Attaching a long-term average P/E of 15 to earnings of $57 implies a fair value for the S&P 500 of about 850 — implying a further decline of about 15% for the S&P 500. While we may need to cut our EPS estimates further, we do not expect earnings to fall by nearly as much as currently implied by stock prices. We recently reduced our 2009 EPS forecast for the S&P 500 to $85 from $90 per share. Our 2008 EPS forecast remains $80.


source: Argus Research, Market Watch, October 9, 2008
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