To get more technical, S&P 500 companies as a group earned $45.95 a share in the four quarters ending Sept. 30, down $78.60 from a year earlier, and the average price-earnings multiple was 22. If earnings fall 10%, to $41.35, and the P/E multiple slips to 15, as expected, the index will close next year at 620, or 30% below today's level. That seems like a reasonable forecast, given what we know now.
Now the somewhat scary thing is that even if you are pretty bullish, it's hard to come up with a target for next year that's very exciting:
- Say you figure that earnings will rebound 15% and investors will decide to pay a 20 multiple. That would be $53 in earnings per share, times 20, or 1,060. That level is 19.5% higher than where we are today, which is great, but in terms of time it gets you back only to the start of October.
- Now say you figure earnings can grow 30% and investors will pay a 21x multiple. That gets you to almost 1,260. This would be a 42% advance but gets you back only to mid-September
The good news? Sure, why not. Let's dream a little. If the S&P 500 rises 20% to 40% next year, then the best sectors and market cap groups would rise 40% to 60%-plus. And if a miracle occurs and fiscal spending actually sparks a recovery, I will point you there without fail. Next week, I'll offer some ideas on what actually could go right and how to plan for it with a small part of your portfolio.