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Table Of Contents Table Of ContentsTable Of Contents
September 28, 2009 / Strategist’s Handbook www.yardeni.com
Yardeni Research, Inc.
Dr. Ed’s ForecastsA: GDP Forecast Table 1B: S&P 500 Earnings Forecasts 2C: S&P 500 Industry Overweights 3D: S&P 500 Industry Underweights 4E: S&P 500 Industry Performance 5F: O-M-U Recommendations 6FiguresDebt 5Great Crashes 6Liquidity 7Interest Rate Spreads 8Stock Prices & Fundamentals 9Fed’s Balance Sheet 10Treasuries & Agencies 11S&P 500 Market Bottoms 12US Stock Price Trends 13World Stock Price Indexes 14Global Stock Markets (ytd) 15Profits 16Profits & Sales 17-18Profit Margin 19Cash Flow 20S&P 500 Write-Offs 21S&P 500 Dividends 22S&P 500 Dividend Yield 23S&P 500/400/600 Quarterly Earnings 200924S&P 500 Earnings Squiggles: Monthly 25S&P 500/400/600 Squiggles: Weekly 26S&P 500 Forward Earnings 27Forward Earnings & Sales 28Forward Earnings & Orders 29Forward Earnings: Industrial Shipments30-31Forward Earnings: IT & Semis 32Forward Earnings: Semi Equipment 33Forward Earnings: Materials & Energy 34Forward Earnings: Energy 35Forward Earnings: Diversified Banks 36Valuation: P/E Ratios 37Valuation: P/E & q 38Valuation: SVM-1 39Valuation: SVM-2 40Valuation: Equity Risk Spread 41Valuation: Rules of 20 42Valuation: Bond Yield 43Valuation: Market Cap 44Market Cap 45S&P 500 Sector Shares 46-47S&P 500/400/600 YTD 48
S&P 500 Sectors Total Forward Earnings49
- A: GDP Forecast Table -
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- B: S&P 500 Earnings Forecasts -
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- C: S&P 500 Industry Overweights -
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- D: S&P 500 Industry Underweights -
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- E: S&P 500 Industry Performance -
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- F: O-M-U Recommendations -
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70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120
100
200
300
400
0
100
200
300
400
Q2
DEBT(as a percent of nominal GDP)
US Treasury Debt / GDP
Total Debt Minus US Treasury Debt / GDP
Source: Federal Reserve Board, Flow of Funds Accounts.
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Figure 1.
Total debt excluding US Treasury debt probably peaked relative to GDP during Q2-2008.
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-5
0
5
10
15
20
-5
0
5
10
15
20
Q2
Q2
BORROWING BY NONFINANCIAL SECTORS(as a percent of nominal GDP)
Households Plus Business / GDP
US Treasury / GDP
Source: Federal Reserve Board, Flow of Funds Accounts.
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Figure 2.
Over the past four quarters, pace of borrowing by households and business plunged, while US Treasury borrowing soared.
- Debt -
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20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 400
50
100
150
200
250
300
350
400
0
50
100
150
200
250
300
350
400DOW JONES INDUSTRIALS AVERAGE
Smoot-Hawley Tariff,June 1930
Source: Haver Analytics.
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Figure 3.
The Great Crash occurred after Congress enacted the Smoot-Hawley Tariff (SHT). DJIA fell 26.3% from September 1929 peak through May 1930. It then plunged 82.8% through July 1932.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010200
300
400
500
600
200
300
400
500
600
9/22
AIG/Lehman Collapse,September 15, 2008
CRB INDUSTRIALS SPOT PRICE INDEX(1967=100)
Source: Commodity Research Bureau.
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Figure 4.
Commodity prices plunged after mid-September 2008, but have recovered smartly so far this year.
- Great Crashes -
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82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 120
2
4
6
8
10
12
0
2
4
6
8
10
12
9/14
MZM* & SMALL TIME DEPOSITS(trillion dollars, sa)
MZM* + Small Time Deposits
MZM*
Savings Deposits
Small Time Deposits +Money Market Mutual Funds**
* MZM equals M2 minus small-denomination time deposits plus institutional money market mutual funds.** Held by individuals and institutions.
Source: Board of Governors of the Federal Reserve System.
Figure 5.
Liquid assets at record high.
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1220
40
60
80
100
120
140
160
180
200
20
40
60
80
100
120
140
160
180
200
9/18
MZM* PLUS SMALL TIME DEPOSITS(as a percentage of Wilshire 5000)
* MZM equals M2 minus small-denomination time deposits plus institutional money market mutual funds.Source: Board of Governors of the Federal Reserve System and Wilshire Associates.
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Figure 6.Figure 6.
- Liquidity -
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Figure 7.
2002 2003 2004 2005 2006 2007 2008 2009 2010.0
.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
.0
.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
9/25
US TREASURY 2-YEAR NOTE & FED FUNDS RATES(percent)
2-Year Treasury Note Yield
Federal Funds Rate Target
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2002 2003 2004 2005 2006 2007 2008 2009 20100
50
100
150
200
250
300
350
400
450
0
50
100
150
200
250
300
350
400
450
9/25
TED SPREAD: UK LIBOR RATE LESS US TREASURY BILL RATE(basis points, using 3-month rates)
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2002 2003 2004 2005 2006 2007 2008 2009 2010-100
-50
0
50
100
150
200
250
300
350
400
450
500
550
600
650
-100
-50
0
50
100
150
200
250
300
350
400
450
500
550
600
650
9/25
BOND SPREADS OVER 10-YEAR TREASURY(basis points)
Seasoned Aaa-Rated Corporate Bond Yield
Seasoned Baa-Rated Corporate Bond Yield
AAA Municipal 30-Year Bond Yield
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- Interest Rate Spreads -
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010600
700
800
900
1000
1100
1200
1300
1400
1500
1600
40
50
60
70
80
90
100
110
120
130
9/19
9/25
S&P 500 INDEX vs. FUNDAMENTAL STOCK MARKET INDICATOR
S&P 500 Index
Average ofConsumer Comfort Indexand BBB*
* CRB raw industrials spot price index divided by initial unemployment claims, four-week moving average.Source: ABC News/Washington Post, Commodity Research Bureau, Department of Labor and Standard & Poor’s Corporation.
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Figure 8.
Fundamental Stock Market Indicator is confirming S&P 500 rally.
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12420
440
460
480
500
520
540
560
580
600
50
100
150
200
250
300
350
9/23
9/19
S&P 500 TRANSPORTATION INDEX vs. RAILCAR LOADINGS
S&P 500 Transportation Index
Total Railcar Loadings(thousand units, 26-wa)
Source: Atlantic Systems and Standard and Poor’s.
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Figure 9.
Plunge in railcar loadings isn’t confirming rally in Transports.
- Stock Prices & Fundamentals -
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Figure 10.
I II III IV I II III IV2008 2009
.0
.2
.4
.6
.8
1.0
1.2
1.4
1.6
1.8
2.0
9/23
FED’S ASSETS*(trillion dollars)
US Treasuries +Agency Debt +MBS
Liquidity Facilities
I II III IV I II III IV2008 2009
.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
9/23
FED’S LIABILITIES*(trillion dollars)
Total
I II III IV I II III IV2008 2009
.0
.2
.4
.6
.8
1.0
9/23
Agency Debt + MBS
US Treasury Securities
I II III IV I II III IV2008 2009
.0
.1
.2
.3
.4
.5
.6
.7
9/23
US TreasuryDeposits at Fed(General &Supplementary)
I II III IV I II III IV2008 2009
.0
.2
.4
.6
9/23
Term Auction Credit
Net PortfolioHoldings ofCommercialPaper FundingFacility
I II III IV I II III IV2008 2009
.0
.1
.2
.3
.4
.5
.6
.7
.8
.9
1.0
9/23
Reserve Balanceswith Fed(Depository InstitutionsDeposits at Fed)
I II III IV I II III IV2008 2009
.0
.1
.2
.3
.4
.5
.6
.7
9/23
Central BankLiquidity Swaps
Other Loans
*Average of daily figures for weeks ending Wednesdays.Source: Federal Reserve Board.
I II III IV I II III IV2008 2009
.76
.78
.80
.82
.84
.86
.88
.90
9/23Federal Reserve Notes
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- Fed’s Balance Sheet -
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Figure 11.
2003 2004 2005 2006 2007 2008 2009 20100
1000
2000
3000
0
1000
2000
30009/23US TREASURIES HELD BY ALL CENTRAL BANKS
(billion dollars)
Held By Foreign Central Banks
Held By Fed
Total US Treasuries Held By Central Banks
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2003 2004 2005 2006 2007 2008 2009 20100
200
400
600
800
1000
1200
1400
1600
1800
0
200
400
600
800
1000
1200
1400
1600
1800
9/23
US AGENCIES HELD BY ALL CENTRAL BANKS(billion dollars)
Held By Foreign Central Banks
Held By Fed
Total Agencies Held by Central Banks
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2003 2004 2005 2006 2007 2008 2009 20100
1000
2000
3000
4000
5000
0
1000
2000
3000
4000
5000
9/23
US TREASURIES & AGENCIES HELD BY ALL CENTRAL BANKS(billion dollars)
Held By Foreign Central Banks
Held By Fed
Total US Treasuries & Agencies Held by Central Banks
Source: Federal Reserve Board, Table H.4.1.*Average of week ending Wednesday.
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- Treasuries & Agencies -
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Figure 12.
2007 2008 2009 2010600
700
800
900
1000
1100
1200
1300
1400
1500
1600P
9/25
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2000 2001 2002 2003760
840
920
1000
1080
1160
1240
1320
1400
1480
1560
1640P T
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I II III IV I II III1998 1999
900
940
980
1020
1060
1100
1140
1180
1220
1260
1300
1340138014201460
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I II III IV I II III1990 1991
290
310
330
350
370
390
410P T
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I II III IV I II III IV1987 1988
210
220
230
240
250
260
270
280
290
300
310
320330340350
Source: Standard & Poor’s Corporation. P/T = peaks and troughs of business cycle. Grey shaded areas are bear markets.
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1980 1981 1982 1983 1984100
110
120
130
140
150
160
170
180T P T
S&P 500 INDEX(ratio scale)
...200-day moving avgyardeni.com
- S&P 500 Market Bottoms -
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60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1250
300
550
800
1050
1300
15501800
50
300
550
800
1050
1300
15501800
S&P 500 INDEX*(ratio scale)
Aug
7%
5%
* Growth paths are compounded monthly to yield 5% and 7% annually.Note: Shaded areas are recessions according to the National Bureau of Economic Research.Source: Standard & Poor’s Corporation.
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Figure 13.
The S&P 500 has increased at a compounded rate of 6% per year on average since 1960.
48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12100
2500
4900
7300
9700121001450016900
100
2500
4900
7300
9700121001450016900
DOW JONES INDUSTRIALS(ratio scale)
Aug10,000
1000
200
Note: Shaded areas are recessions according to the National Bureau of Economic Research.Source: Dow Jones Inc.
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Figure 14.
DJIA trading below 10,000 again since October 2007.
- US Stock Price Trends -
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Figure 15.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010500
700
900
1100
1300
500
700
900
1100
1300
9/25
SHARE PRICE INDEXES(ratio scale)
World
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010500
1000
1500
2000
500
1000
1500
2000
9/25Europe
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010500
700
900
1100
1300
500
700
900
1100
1300
9/25
EAFE*
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201010000
20000
30000
400005000060000
10000
20000
30000
400005000060000
9/25Emerging Markets
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010100
300
500
700900
100
300
500
700900
9/28Emerging Markets:Asia
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010600
3200
5800840011000
600
3200
58008400
11000
9/25Emerging Markets:Latin America
Source: Morgan Stanley Capital International.*Europe, Australia, and Far East.
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- World Stock Price Indexes -
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-20
0
20
40
60
80
10091.8
Figure 16.
ARGENTINA___________Merval
-20
0
20
40
27.8
AUSTRALIA__________All Ordinaries
-20
0
20
40
60
80
59.4
BRAZIL______Bovespa
-20
-10
0
10
20
30
40
26.1
CANADA________Toronto 300
-5
0
5
10
15
20
25
30
35
40 38.4CHILE_____IGPA General
-10
10
30
50
70
90
110
61.4
CHINA______Dow Jones ShanghaiComposite
-30
-20
-10
0
10
20
30
40
32.5CZECH REPUBLIC________________PX50
-30
-10
10
30
50
15.4
EGYPT______Cairo SE General
-30
-20
-10
0
10
20
30
18.8
FRANCE_______CAC 40
-30
-20
-10
0
10
20
30
17.9
GERMANY_________DAX
-40
-20
0
20
40
60
43.0HONG KONG___________Hang Seng
-30
-10
10
30
50
70
90
68.1
HUNGARY_________BUX
-20
0
20
40
60
8073.0INDIA_____
Bombay Sensex
-20
0
20
40
60
80
100
74.2
INDONESIA__________Jakarta
-10
0
10
20
30
40
50
60
7064.6ISRAEL______
Tel Aviv 100
-50
-30
-10
10
30
19.6ITALY_____FTSE MIB
-10
0
10
20
30
40
50
37.5
MALAYSIA_________Kuala Lumpur
-30
-20
-10
0
10
20
30
40
31.3MEXICO_______Bolsa
-30
-10
10
30
50
26.8
NETHERLANDS_____________Amsterdam
-35
-15
5
25
45
65
85
60.4
PAKISTAN_________Karachi
-10
10
30
50
70
90
110
130
113.3PERU_____Lima
-10
0
10
20
30
40
50
60
44.7
THE PHILIPPINES________________Manila
-40
-20
0
20
40
60
80
100
120
97.6RUSSIA______RTS
-20
0
20
40
60
49.2SINGAPORE___________Straits Times
-20
-10
0
10
20
30
40
50
60
47.5SOUTH KOREA_____________Kospi
-20
-10
0
10
20
30
40
50
37.0
SWEDEN________AffarsvardnGen
-30
-20
-10
0
10
20
12.5SWITZERLAND_____________SMI
-20
0
20
40
60
80
58.6
TAIWAN_______TWSE
-20
-10
0
10
20
30
40
50
60
70
55.0THAILAND_________Bangkok
-20-10
0102030405060708090
77.9TURKEY_______IMKB National 100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2009
-30
-20
-10
0
10
2016.4UNITED KINGDOM________________
FTSE 100
Source: Haver Analytics.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2009
-30
-20
-10
0
10
20
30
15.6
UNITED STATES______________S&P 500 Index
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2009
-5
5
15
25
35
45
55
65
47.2
VENEZUELA___________IBC
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- Global Stock Markets (ytd) -
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89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 100
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
Q1
Q2
S&P 500 & NIPA CORPORATE PROFITS*(billion dollars)
NIPA After Tax Profits (saar)_______________________
Based on Tax Returns*
From Current Production**
S&P 500 Net Income(4-quarter sum)_________________
OperatingReported
* Excluding IVA & CCadj. ** Including IVA & CCadj. These two adjustments restate the historical cost basisused in profits tax accounting for inventory withdrawals and depreciation to the current cost measuresused in GDP.Source: US Department of Commerce, Bureau of Economic Analysis, and Standard & Poor’s Corporation.
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Figure 17.
NIPA after-tax profits based on tax returns increased for the second time in six quarters during Q2. This measure of profits excludes write-offs, so it is similar to S&P 500 operating net income rather than to S&P 500 reported net income. Cash flow profits (from current production) also moving higher.
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10.30
.35
.40
.45
.50
.55
.60
.65
.70
.75
.80
.85
.90
.95
1.00
1.05
.30
.35
.40
.45
.50
.55
.60
.65
.70
.75
.80
.85
.90
.95
1.00
1.05
Q1
S&P 500 OPERATING NET INCOME (4-quarter sum)(as a ratio of NIPA after-tax corporate profits based on tax returns, 4-quarter sum)*
Average = 0.60
* Excluding IVA & CCadj. These two adjustments restate the historical cost basis used in profits tax accountingfor inventory withdrawals and depreciation to the current cost measures used in GDP.Source: US Department of Commerce, Bureau of Economic Analysis, and Standard & Poor’s Corporation.
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Figure 18.
When this ratio is above (below) average, S&P 500 earnings may overstate (understate) actual profits.
- Profits -
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60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1275
775
1475
2175
2875
357542754975
75
775
1475
2175
2875
357542754975
Q2
NOMINAL GDP & AFTER-TAX CORPORATE PROFITS(1960=100, ratio scale)
Nominal GDP
7% Growth Path*
After-Tax Corporate Profits______________________
Reported to IRS
From Current Production**
* Compounded monthly to yield 7% annually.** Includes IVA & CCAdj. These two adjustments restate the historical costs basis used in profits tax accounting for
inventory withdrawals and depreciation to the current cost measures used in GDP.Source: US Department of Commerce, Bureau of Economic Analysis.
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Figure 19.
In recent years, above-trend growth in profits was attributable to overseas profits and earnings of Financials. Both remain weak, though the latter turned up last quarter.
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 123
18
33
48
63
78
93108123
3
18
33
48
63
78
93108123
Q2
Sep
S&P 500 EARNINGS PER SHARE(ratio scale, dollars)
S&P 500 Earnings Per Share*_______________________
Reported(4-quarter sum)
Operating**(4-quarter sum)
Forward***
7%
5%
Q2
* Growth paths are compounded monthly to yield 5% and 7% annually.** Excludes write-offs.
*** 52-week forward consensus expected S&P 500 operating earnings per share. Time-weighted average of current andnext year’s consensus earnings estimates. Monthly through April 1994; weekly thereafter.Source: Standard & Poor’s Corporation and Thomson Financial.
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Figure 20.
These three alternative measures of earnings often tell three different stories. The market has tended to discount the most optimistic of the three, i.e., forward earnings.
- Profits & Sales -
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89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-110
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
-20
-15
-10
-5
0
5
10
15
Q2
Q1
S&P 500 OPERATING EARNINGS & BUSINESS SALES(yearly percent change)
Business Sales*
S&P 500 Operating Earnings
* Manufacturing and trade sales.Source: Thomson Financial and US Department of Commerce, Bureau of the Census.
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Figure 21.
Growth rates in S&P 500 operating earnings and business sales are highly correlated.
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1220
25
30
35
40
45
20
25
30
35
40
45
Q2
CORPORATE PROFITS FROM THE REST OF THE WORLD*(as a percent of corporate profits)
Receipts
Source: US Department of Commerce, Bureau of Economic Analysis.
yard
eni.c
om
Figure 22.
Profits from overseas share of total profits down from 2008 record high, but still above 30%.
- Profits & Sales -
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Figure 23.
48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 126
8
10
12
14
16
6
8
10
12
14
16
PRE-TAX CORPORATE PROFITS FROM CURRENT PRODUCTION*
Q2
As a percent of National Income
As a percent of Nominal GDP
48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 126
7
8
9
10
11
12
13
14
15
16
6
7
8
9
10
11
12
13
14
15
16
AFTER-TAX PROFIT MARGIN FROM CURRENT PRODUCTION*(percent)
Q2All Corporations
Average = 10.4%
48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1265
70
75
80
85
90
95
100
2
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6
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AFTER-TAX PROFIT MARGIN& CAPACITY UTILIZATION
Q2
After-Tax Nonfinancial CorporateProfit Margin*
Capacity Utilization: All Industries
Note: Shaded areas are recessions according to the National Bureau of Economic Research.
*Includes IVA & CCAdj. These two adjustments restate the historical-cost basis used in profits tax accounting for inventory withdrawals anddepreciation to the current-cost measures used in GDP.
Source: Federal Reserve Board and US Department of Commerce, Bureau of Economic Analysis.
yardeni.com
- Profit Margin -
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60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1220
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820
1020122014201620
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1020122014201620
Q2CORPORATE CASH FLOW(ratio scale, billion dollars, saar)
Tax-Reported Depreciation***
Economic Depreciation**
* After-tax retained earnings plus tax-reported depreciation.** Corporate capital consumption allowances.
*** Corporate capital consumption allowances with capital consumption adjustment.Source: US Department of Commerce, Bureau of Economic Analysis.
CorporateCash Flow*
yardeni.com
Figure 24.
Corporate cash flow stalled near recent record highs.
-175-150-125-100-75-50-250255075100125150175200
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INVENTORY VALUATION ADJUSTMENT*(billion dollars, saar)
CAPITAL CONSUMPTION ADJUSTMENT*(billion dollars, saar)
Tax-Reported > Economic Depreciation
Tax-Reported < Economic Depreciation
* These two adjustments restate the historical cost basis used in profits tax accounting for inventorywithdrawals and depreciation to the current cost measures used in GDP.Source: US Department of Commerce, Bureau of Economic Analysis.
yardeni.com
Figure 25.
Inventory Valuation Adjustment volatile recently.
- Cash Flow -
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89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10-25
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S&P 500 OPERATING VS REPORTED EARNINGS PER SHARE(dollars)
Operating
Reported
Source: Standard & Poor’s Corporation.
yardeni.com
Figure 26.
During H1-2009, reported earnings rebounded as write-offs increased at a much slower pace than during Q4-2008. Operating earnings also recovered during H1-2009.
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100
S&P 500 WRITE-OFFS PER SHARE*(dollars)
4-Quarter Sum
Actual x 4
Q2
* Operating less reported earnings per share.Source: Standard & Poor’s Corporation.
yardeni.com
Figure 27.Figure 27.
- S&P 500 Write-Offs -
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46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12.3
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20.3
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.3
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Q2
Q2
S&P 500 DIVIDENDS & RETAINED EARNINGS PER SHARE(dollars, trailing 4-quarter sum, ratio scale)
Dividends
Retained Earnings*
* Reported earnings minus dividends per share.Source: Standard & Poor’s Corporation.
yardeni.com
Figure 28.
Retained earnings remained in recession during Q2-2009.
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46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1265
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S&P DIVIDEND PAYOUT RATIOS*(percent)
S&P 500
S&P Industrials
S&P 500 COMPANIES PAYING A DIVIDEND(percent of total)
* Four-quarter trailing dividends per share divided by four-quarter trailing reported earnings.Source: Standard & Poor’s Corporation and FactSet.
yardeni.com
Figure 29.
The average dividend payout ratio (using reported earnings) dropped from 55% during the 1950s and 1960s to 44% during the 1970s, 43% during the 1980s, and 41% during the 1990s. It soared at the end of last year. The percentage of S&P 500 companies paying dividends increased from 70.2% in 2002 to 77.8% in 2007 from 77.0% in 2006.
- S&P 500 Dividends -
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46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120
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Q1
TREASURY BILL YIELD VS S&P 500 DIVIDEND YIELD(percent)
Three-Month Treasury Bill Yield
S&P 500 Dividend Yield*
Aug
* S&P 500 four-quarter trailing dividends per share divided by quarterly closing S&P 500 index.Source: Standard & Poor’s Corporation and Board of Governors of the Federal Reserve System.
yardeni.comFigure 30.
The dividend yield exceeds the T-bill rate.
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 122
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S&P 500 DIVIDEND YIELD(trailing 4-quarter sum)
Invested in 1970
Invested in 1980
Invested in 1990
Source: Standard & Poor’s Corporation.
yardeni.com
Figure 31.
Dividend yields tend to rise over time relative to the initial sum invested.
- S&P 500 Dividend Yield -
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Figure 32.
III IV I II III IV I2008 2009 2010
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S&P 500 EARNINGS PER SHARE: CONSENSUS QUARTERLY FORECASTS*(weekly, analysts’ average forecasts in dollars)
2009 By Quarter_____________(as of 09/25/09)
Q4
yardeni.com
III IV I II III IV I2008 2009 2010
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S&P 400 MIDCAP EARNINGS PER SHARE: CONSENSUS QUARTERLY FORECASTS*(weekly, analysts’ average forecasts in dollars)
2009 By Quarter_____________(as of 09/25/09)
yardeni.com
III IV I II III IV I2008 2009 2010
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S&P 600 SMALLCAP EARNINGS PER SHARE: CONSENSUS QUARTERLY FORECASTS*(weekly, analysts’ average forecasts in dollars)
2009 By Quarter_____________(as of 09/25/09)
* Consensus expected S&P 600 SmallCap operating earnings per share for each quarter shown. Source: Thomson Financial.
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- S&P 500/400/600 Quarterly Earnings 2009 -
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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1020
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S&P 500 OPERATING EARNINGS PER SHARE(analysts’ average forecasts, ratio scale)
Consensus Forecasts_________________
Annual estimates
12-month forward*
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-2.6 -13.1 12.5 17.6 17.0 17.8 8.7 9.8 -1.6 15.1 10.2 -19.4 6.3 15.2 21.2 13.9 15.6 -3.4 -11.8 -8.7 25.7
* Time-weighted average of current and next years’ consensus earnings estimates. Numbers abovetime line are annual growth rates.Source: Thomson Financial.
Figure 33.
In the past, Earnings Squiggles showed that analysts were usually overly optimistic about the earnings outlook. Consensus annual earnings forecasts rose in 2004 (for the first time since 1995) and also in 2005 and 2006. They’ve been falling since Q3-2007. Earnings estimated to fall 8.7% in 2009 and then rise 25.7% in 2010.
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 199010
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35S&P 500 OPERATING EARNINGS PER SHARE(analysts’ average forecasts, ratio scale)
Consensus Forecasts_________________
Annual estimates
12-month forward*
Actual 4Q sum
80
81
82 8384
8586 87
88
89
90
3.7 -17.0 13.8 17.5 -8.0 3.7 12.1 41.3 -4.2 -2.6
* Time-weighted average of current and next year’s consensus earnings estimates. Numbers abovetime line are annual growth rates.Source: Thomson Financial.
yardeni.com
Figure 34.Figure 34.
- S&P 500 Earnings Squiggles: Monthly -
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Figure 35.
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S&P 500 OPERATING EARNINGS PER SHARE(analysts’ average forecasts, ratio scale)
Consensus Forecasts_________________
Annual estimates
52-week forward*
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0405
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yardeni.com
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S&P 400 MIDCAP OPERATING EARNINGS PER SHARE(analysts’ average forecasts, ratio scale)
Consensus Forecasts_________________
Annual estimates
52-week forward*
02
03
04
0506
0708
0910
11
yardeni.com
2003 2004 2005 2006 2007 2008 2009 201010
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S&P 600 SMALLCAP OPERATING EARNINGS PER SHARE(analysts’ average forecasts, ratio scale)
Consensus Forecasts_________________
Annual estimates
52-week forward*
02
03
0405
06
0708
0910
11
* Time-weighted average of current and next years’ consensus earnings estimates. Source: Thomson Financial.
yardeni.com
- S&P 500/400/600 Squiggles: Weekly -
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85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1215
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9/25
S&P 500 EARNINGS PER SHARE: FORWARD & ACTUAL(dollars)
S&P 500 Earnings Per Share________________________
Operating Earnings(4-quarter sum)
Forward Earnings*
* 52-week forward consensus expected S&P 500 operating earnings per share. Time-weighted average of current andnext year’s consensus earnings estimates. Monthly through April 1994; weekly thereafter.Source: Thomson Financial.
yardeni.com
Figure 36.
Forward earnings is a good leading indicator of operating earnings except during downturns.
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1210
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Q2
S&P 500 EARNINGS PER SHARE: FORWARD & ACTUAL(dollars)
S&P 500 Earnings Per Share________________________
Operating Earnings(4-quarter sum)
Forward Earnings*(pushed 52-weeks ahead)
* 52-week forward consensus expected S&P 500 operating earnings per share. Time-weighted average of current andnext year’s consensus earnings estimates. Monthly through April 1994; weekly thereafter.Source: Thomson Financial.
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Figure 37.Figure 37.
- S&P 500 Forward Earnings -
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92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1225
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9/25
S&P 500 FORWARD EARNINGS PER SHARE & BUSINESS SALES
Business Sales**(billion dollars, saar)
S&P 500 Forward Earnings*(weekly, dollars per share)
* 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through March 1994, weeklythereafter. Time-weighted average of current and next year’s consensus earnings estimates.
** Manufacturing and trade sales.Source: Thomson Financial and US Department of Commerce, Bureau of the Census.
yardeni.com
Figure 38.
S&P 500 forward earnings is highly correlated with business sales.
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-40
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9/25
S&P 500 FORWARD EARNINGS & BUSINESS SALES(yearly percent change)
Business Sales**
S&P 500 Forward Earnings*(weekly)
* 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through March 1994, weeklythereafter. Time-weighted average of current and next year’s consensus earnings estimates.
** Manufacturing and trade sales.Source: Thomson Financial and US Department of Commerce, Bureau of the Census.
yardeni.com
Figure 39.Figure 39.
- Forward Earnings & Sales -
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201235
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Jul
9/25
S&P 500 FORWARD EARNINGS & FACTORY ORDERS
Total New Factory Orders(trillion dollars, saar)
S&P 500 Forward Earnings*(weekly)
* 52-week forward consensus expected S&P 500 operating earnings per share. Time-weighted average of current andnext year’s consensus earnings estimates. Monthly through April 1994; weekly thereafter.Source: Thomson Financial and US Department of Commerce, Bureau of the Census.
yardeni.com
Figure 40.
S&P 500 forward earnings is highly correlated with new factory orders and shipments.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201235
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9/25
S&P 500 FORWARD EARNINGS & ORDERS
Total New Factory Shipments(trillion dollars, saar)
S&P 500 Forward Earnings*(weekly)
Total New Factory Shipments ExcludingPetroleum & Coal Products(trillion dollars, saar)
* 52-week forward consensus expected S&P 500 operating earnings per share. Time-weighted average of current andnext year’s consensus earnings estimates. Monthly through April 1994; weekly thereafter.Source: Thomson Financial and US Department of Commerce, Bureau of the Census.
yardeni.com
Figure 41.Figure 41.
- Forward Earnings & Orders -
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20128
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Sep
S&P 500 FORWARD EARNINGS & SHIPMENTS:AEROSPACE & DEFENSE
Total Aircraft Shipments(12-month sum, billion dollars, saar)
S&P 500 Forward Earnings:Aerospace & Defense*
* Time-weighted average of current and next year’s consensus estimates.Source: Census Bureau and Thomson Financial.
yardeni.com
Figure 42.
Aerospace & Defense forward earnings and aircraft shipments tend to have same trends.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20125
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Sep
S&P 500 FORWARD EARNINGS & SHIPMENTS:CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS
Shipments**(billion dollars, saar)
S&P 500 Forward Earnings:Construction & Farm Machinery &Heavy Trucks*
* Time-weighted average of current and next year’s consensus earnings estimates.** Shipments include farm machinery, construction machinery and heavy duty trucks.
Source: US Department of Commerce, Bureau of the Census and Thomson Financial.
Figure 43.
Construction & Farm Machinery & Heavy Trucks forward earnings highly correlated with total shipments of these three industries.
- Forward Earnings: Industrial Shipments -
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20127
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S&P 500 FORWARD EARNINGS & SHIPMENTS:INDUSTRIAL MACHINERY
S&P 500 Forward Earnings:Industrial Machinery*
Machinery Shipments(billion dollars, saar, 3-ma)
* 52-week consensus expected S&P 500 operating earnings per share. Time-weighted average of current and next year’sconsensus earnings estimates.Source: Thomson Financial and Bureau of the Census.
yardeni.com
Figure 44.
Good correlation between Machinery shipments and Industrial Machinery forward earnings.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20125
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S&P 500 FORWARD EARNINGS & SHIPMENTS:ELECTRICAL COMPONENTS & EQUIPMENT
S&P 500 Forward Earnings: ElectricalComponents & Equipment*
ElectricalEquipmentShipments(billion dollars,saar, 3-ma)
* 52-week consensus expected S&P 500 operating earnings per share. Time-weighted average of current and next year’sconsensus earnings estimates.Source: Thomson Financial and Bureau of the Census.
yardeni.com
Figure 45.
Good correlation between forward earnings of Electrical Components & Equipment and shipments of Electrical Equipment.
- Forward Earnings: Industrial Shipments -
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20125
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S&P 500 FORWARD EARNINGS & SHIPMENTS:INFORMATION TECHNOLOGY
Manufacturers’Shipments: High Tech**(billion dollars, saar)
S&P 500 Forward Earnings:Information Technology*
* 12-month forward consensus expected operating earnings per share for the S&P 500 InformationTechnology sector.
** Computers and electronic products, which include computers and related products, communicationsequipment, and semiconductors.Source: Thomson Financial and US Department of Commerce, Bureau of the Census.
yardeni.com
Figure 46.
Tech forward earnings and shipments have bottomed.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201230
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S&P 500 FORWARD EARNINGS & SHIPMENTS:SEMICONDUCTORS
Shipments: Semiconductors(billion dollars, saar)
S&P 500 Forward Earnings:Semiconductors*
* 12-month forward consensus expected operating earnings per share for the S&P 500 Semiconductorsindustry.Source: Thomson Financial and US Department of Commerce, Bureau of the Census.
yardeni.com
Figure 47.
Semiconductor shipments extremely volatile. They may be bottoming.
- Forward Earnings: IT & Semis -
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-5
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S&P 500 FORWARD EARNINGS & BOOKINGS: SEMICONDUCTOR EQUIPMENT
Bookings(billion dollars, saar, 3-ma)
Forward Earnings*
* Dollars per share. Time-weighted average of current and next year’s consensus earnings estimates.Source: Semiconductor Equipment and Materials International and Thomson Financial.
yardeni.com
Figure 48.
Semi equipment orders and forward earnings are highly correlated and very cyclical. Industry’s stock price index tends to lead bookings.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-100
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SEMICONDUCTOR EQUIPMENT: STOCK PRICES & BOOKINGS(yearly percent change)
Bookings
Stock Price Index
Source: Semiconductor Equipment and Materials International and Standard & Poor’s Corporation.
yardeni.com
Figure 49.Figure 49.
- Forward Earnings: Semi Equipment -
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20125
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Sep
S&P 500 FORWARD EARNINGS & PRICES:MATERIALS
CRB Raw IndustrialsSpot Price Index(weekly)
S&P 500 Forward Earnings:Materials*
* 12-month forward consensus expected operating earnings per share. Time-weighted average of current and next year’sconsensus earnings estimates.Source: Thomson Financial and Commodity Research Bureau.
yardeni.com
Figure 50.
Materials’ forward earnings tends to move with industrial commodity prices.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
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S&P 500 FORWARD EARNINGS & WORLD CRUDE OIL OUTLAYS*(REVENUES)
Total World Crude Oil Revenues(billion dollars)
S&P 500 Forward Earnings: Energy**
* Total world daily crude oil demand multiplied by 365 days and by the US average import crude oil price.** 12-month forward consensus expected operating earnings per share. Time-weighted average of current and next year’s
consensus earnings estimates.Source: Energy Intelligence Group, "Oil Market Intelligence" and Thomson Financial.
yardeni.com
Figure 51.
In July, the world’s consumers of oil paid $1,926 billion (at an annual rate), down from a peak of $3,932 billion during July 2008.
- Forward Earnings: Materials & Energy -
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
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S&P 500 FORWARD EARNINGS & INTERNATIONAL RIG COUNT
S&P 500 Forward Earnings:Oil & Gas Drilling*
Total World Rotary Rig Count
* Time-weighted average of current and next year’s consensus earnings estimates.Source: Thomson Financial and Baker Hughes.
yardeni.com
Figure 52.
This industry’s forward earnings plunged along with world rotary rig count, but may be bottoming.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20104
8
12
16
20
24
28
32
36
40
44
48
5
7
9
11
13
15
17
19
21
23
Jul
Aug
S&P 500 FORWARD EARNINGS & SHIPMENTS:OIL & GAS EQUIPMENT SERVICES
S&P 500 Forward Earnings:Oil & Gas Equipment & Services*
Mining, Oil Field &Gas Field Machinery Shipments(3-ma, billion dollars, saar)
* 52-week consensus expected S&P 500 operating earnaings per share. Time-weighted average of current and next year’sconsensus earnings estimates. Source: Thomson Financial and Bureau of the Census.
yardeni.com
Figure 53.
Oil & Gas Equipment forward earnings bottoming.
- Forward Earnings: Energy -
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-70
-50
-30
-10
10
30
-2
-1
0
1
2
3
4
5
Aug
Sep
S&P 500 BANKS EARNINGS & YIELD CURVE
Yield Curve**
S&P 500 Diversified BanksForward Earnings*(yearly percent change)
* 12-month forward consensus expected operating earnings per share. Time-weighted average of current and next year’sconsensus earnings estimates.
** 10-year Treasury yield less the federal funds rate.Source: Thomson Financial and the Board of Governors of the Federal Reserve System.
yardeni.com
Figure 54.
Yield curve and credit-quality spread are key drivers of Diversified Banks’ earnings growth.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-75
-65
-55
-45
-35
-25
-15
-5
5
15
25
550
525
500
475
450
425
400
375
350
325
300
275
250
225
200
175
150
125
100
75
9/25
Sep
S&P FORWARD EARNINGS & CORPORATE BOND SPREAD: FINANCIALS
A-Rated CorporateBond Yield**Less 10-YearGovernment Bond Yield(inverted scale, basis points)
S&P 500 ForwardEarnings:Diversified Banks*(yearly percent change)
* 12-month forward consensus expected operating earnings per share. Time-weighted average of current and next year’sconsensus earnings estimates.
** Moody’s Corporate A monthly through 1987, then weekly through 2005. Beginning in 2006 S&P Corporate A.Source: Moody’s Investors Service, Thomson Financial, and the Board of Governors of the Federal Reserve System.
yardeni.com
Figure 55.Figure 55.
- Forward Earnings: Diversified Banks -
Page 36 / September 28, 2009 / Strategist’s Handbook www.yardeni.com
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Figure 56.
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120102030405060708090100110120130
0102030405060708090
100110120130
Q2
9/25
P/E RATIOS FOR S&P 500
Using 4-quarter trailing reported earnings
Using S&P 500 forward earnings*
* Price divided by 12-month forward consensus expected operating earnings per share using mid-month data. Monthly data through April 1994,weekly thereafter.
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120
50
100
150
0
50
100
150
Q2
US EQUITY MARKET CAPITALIZATION: NONFINANCIAL CORPORATIONS(as a ratio of NFC after-tax profits from current production*)
NFC P/E
S&P 500 Trailing P/E**
S&P 500 Average P/E = 17.4
* Including IVA and CCadj. These two adjustments restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP.** Using four-quarter trailing reported earnings.
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120
5
10
15
20
25
30
35
40
0
5
10
15
20
25
30
35
40
Q2
US EQUITY MARKET CAPITALIZATION EXCLUDING FOREIGN ISSUES
As a ratio of:__________
After-tax profits from current production* (Avg = 13.8)
Corporate Cash Flow** (Avg = 9.1)
* Including IVA and CCadj. These two adjustments restate the historical cost basis used in profits tax accounting for inventory withdrawalsand depreciation to the current cost measures used in GDP.** After-tax operating retained earnings plus tax-return-based depreciation.Source: Thomson Financial, U.S. Department of Commerce, Bureau of Economic Analysis, Federal Reserve Board Flow of Funds Accounts,and Standard & Poor’s Corporation.
yardeni.com
- Valuation: P/E Ratios -
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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 125
10
15
20
25
30
35
40
45
50
5
10
15
20
25
30
35
40
45
50
Sep
P/E RATIOS FOR S&P 500(using 12-month forward earnings*)
S&P 500
Technology
Ex Technology
* Price divided by 12-month forward consensus expected operating earnings per share using mid-month data.Data from 1995 based on Global Industry Classification Standard.Source: Thomson Financial.
yardeni.com
Figure 57.
P/E measures are down sharply from 1999/2000 peaks. Prior to 1998, Tech usually traded at roughly the same P/E as the overall market. It is doing so again recently.
52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12.0
.5
1.0
1.5
2.0
2.5
3.0
.0
.5
1.0
1.5
2.0
2.5
3.0
Q2
TOBIN’S q FOR NONFINANCIAL CORPORATIONS*(ratio)
Actual q
Adjusted q**
* Ratio of market value of equities to net worth at market value, which includes real estate at market valueand equipment, software, and inventories at replacement cost.
Source: Federal Reserve Board Flow of Funds Accounts.** Actual divided by average since 1952.
yardeni.com
Figure 58.
Tobin’s q has limited value as a stock valuation model, although it did indicate significant overvaluation during the late 1990s.
- Valuation: P/E & q -
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Figure 59.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-100
-80
-60
-40
-20
0
20
40
60
80
-100
-80
-60
-40
-20
0
20
40
60
80
9/25
STOCK VALUATION MODEL #1 (SVM-1)*(weekly, percent)
Overvalued
Undervalued
* Ratio of S&P 500 Index to its fair value (52-week forward consensus expected S&P 500 operating earnings per share divided by the 10-year US Treasury bond yield minus 100). Monthly through April 1994, weekly thereafter.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 125
10
15
20
25
30
35
40
45
50
5
10
15
20
25
30
35
40
45
50
9/25
9/25
FORWARD P/E & BOND YIELD (SVM-1)(weekly)
Bond’s P/E=Reciprocal Of10-Year US Treasury Bond Yield
Ratio Of S&P 500 Price To Expected Earnings*
* 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through March 1994, weekly thereafter.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 120
10
20
30
40
50
60
70
80
90
100
110
0
10
20
30
40
50
60
70
80
90
100
110
9/25
9/25
MARKET’S ESTIMATE OF EARNINGS (SVM-1)(weekly, dollars per share)
S&P 500 Forward Earnings_____________________
Market’s Estimate*
Analysts’ Estimate**
* S&P 500 index multiplied by 10-year government bond yield. Monthly through March 1994, weekly thereafter.** 12-month forward consensus expected S&P 500 operating earnings per share. Monthly through March 1994, weekly thereafter. Source: Standard & Poor’s Corporation and Thomson Financial.
yardeni.com
- Valuation: SVM-1 -
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Yardeni Research, Inc.
Figure 60.
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-40
-20
0
20
40
60
-40
-20
0
20
40
60
Aug
STOCK VALUATION MODEL #2 (SVM-2)*(percent)
Overvalued
Undervalued
* Ratio of S&P 500 index to its fair value (12-month forward consensus expected S&P 500 operating earnings per share divided by the difference between Moody’s A-rated corporate bond yield less fraction [0.10] of 5-year consensus expected earnings growth).
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12150
750
1350
1950
2550315037504350
150
750
1350
1950
2550315037504350
Aug
.10
.20
.25
STOCK VALUATION MODEL (SVM-2)(ratio scale)
5-year earningsgrowth weight_____________
.25
.20
.10
Actual S&P 500
Fair Value S&P 500*
* Fair value is 12-month forward consensus expected S&P 500 operating earnings per share divided by the difference between Moody’s A-rated corporate bond yield less fraction (as shown above) of 5-year consensus expected earnings growth.
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
9/25
ADDITIONAL VARIABLES IN SVM-2
Corporate A-rated yield* less 10-year Treasury yield
0.1 times Long-term consensusexpected earnings growth
*Moody’s Corporate A monthly through 1987, then weekly through 2005. Beginning in 2006 S&P Corporate A. Source: Moody’s Investors Service and Thomson Financial.
yardeni.com
- Valuation: SVM-2 -
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 120
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
9/25
Aug
S&P 500 EARNINGS YIELD & REAL BOND YIELD
10-year US Treasury Bond Yield MinusAverage Expected CPI Inflation RateFor Next 10 Years (Phili Fed Survey)*
S&P 500 ExpectedEarnings To Price Ratio**
10-Year TIPS Yield***(weekly)
* Data from 1979 to 1991 quarterly, monthly thereafter.** Earnings-price ratio is based on the Thomson Financial consensus estimates of earnings over the coming 12 months.
*** Yields on Treasury inflation protected securities (TIPS) adjused to constant maturities.Source: Board of Governors of the Federal Reserve System, US Treasury, Thomson Financial, and Federal ReserveBank of Philadelphia.
yardeni.com
Figure 61.
This is another valuation model that compares the earnings yield to the real, rather than nominal, bond yield.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-1
1
3
5
7
9
11
13
-1
1
3
5
7
9
11
13
Q2
S&P 500 EARNINGS YIELD MINUS REAL BOND YIELD*
* S&P 500 forward expected earnings to price ratio minus 10-year Treasury bond yield minus average expected CPIinflation rate for next 10 years (Phili Fed Survey).Source: Board of Governors of the Federal Reserve System, US Treasury, Thomson Financial, and Federal ReserveBank of Philadelphia.
yardeni.com
Figure 62.Figure 62.
- Valuation: Equity Risk Spread -
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Yardeni Research, Inc.
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 132
4
6
8
10
12
14
16
18
20
22
24
26
28
2
4
6
8
10
12
14
16
18
20
22
24
26
28
S&P 500 Price toExpected Earnings Ratio*
(dotted line)
20 Minus 10-Year US TreasuryBond Yield(solid line)
RULE OF 20: P/E VS BOND YIELD
9/25
* Using four-quarter trailing reported earnings per share from 1965 to September 1978. Then 12-monthforward consensus expected S&P 500 operating earnings per share from October 1978 through March 1994,weekly after.Note: Shaded areas are periods when S&P 500 fell 15% or more.Source: Thomson Financial and Board of Governors of the Federal Reserve System.
yardeni.com
Figure 63.
The "Rule of 20": The market’s forward P/E has often traded around 20 minus the 10-year Treasury bond yield.
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1210
15
20
25
30
10
15
20
25
30
Aug
CONSUMER PRICE INDEX (yearly percent change) PLUS S&P 500 FORWARD P/E
StocksOvervalued
StocksUndervalued
Source: Thomson Financial and US Department of Labor, Bureau of Labor Statistics.
yardeni.com
Figure 64.
Another "Rule of 20" is that stocks are overvalued (undervalued) when CPI inflation rate plus S&P 500 forward earnings yield is greater than (less than) 20.
- Valuation: Rules of 20 -
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62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12-4
-2
0
2
4
6
8
10
12
14
16
18
-4
-2
0
2
4
6
8
10
12
14
16
18
Q2
BOND YIELD & NOMINAL GDP
GDP(yearly percent change,average = 7.4%)
10-Year GovernmentBond Yield(percent,average = 7.1%)
Source: US Department of Commerce, Bureau of Economic Analysis, and Board of Governors of theFederal Reserve System.
yardeni.com
Figure 65.
This simple bond model compares the yield to the growth in nominal GDP.
62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
Q2
BOND YIELD & NOMINAL GDP*
* 10-year bond yield minus yearly percent change in nominal GDP.Source: US Department of Commerce, Bureau of Economic Analysis, and Board of Governors of theFederal Reserve System.
1962-1979 average = minus 269 basis points
1980-1994 average =plus 246 basis points
1995-2003 average =plus 51 basis points
yardeni.com
Figure 66.Figure 66.
- Valuation: Bond Yield -
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Yardeni Research, Inc.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201090
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
250
260
270
280
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
250
260
270
280
9/25
S&P FORWARD EARNINGS PER SHARE(weekly, Jan 1999=100)
Forward Earnings*_______________
S&P 500 LargeCap
S&P 600 SmallCapS&P 400 MidCap
* 52-week forward consensus expected operating earnings per share. Time-weighted average of the current year’sand next year’s consensus forecast. Source: Thomson Financial.
yardeni.com
Figure 67.
Forward earnings for S&P 500, S&P 400, and S&P 600 bottomed earlier this year.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20107
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
9/25
P/E RATIOS FOR S&P INDEXES*(weekly)
S&P 500 LargeCap
S&P 400 MidCap
S&P 600 SmallCap
* Price divided by 52-week forward consensus expected operating earnings per share.Source: Thomson Financial.
yardeni.com
Figure 68.
Forward P/Es up sharply from 2008 lows.
- Valuation: Market Cap -
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Yardeni Research, Inc.
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 122
4
6
8
10
12
14
16
18
20
22
24
26
28
2
4
6
8
10
12
14
16
18
20
22
24
26
28
9/25
Q2
Q2
US EQUITY MARKET CAPITALIZATION(trillion dollars)
Market Value___________
Total
Excluding Foreign Issues
S&P 500 (weekly)
Source: Standard & Poor’s Corporation and Federal Reserve Board Flow of Funds Accounts.
yardeni.com
Figure 69.
The value of stocks is rebounding.
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 122000
4000
6000
8000
10000
12000
14000
16000
2000
4000
6000
8000
10000
12000
14000
16000
9/25
WILSHIRE 5000 INDEX(daily, 1/2/80 = 1078.9)
Source: Wilshire Associates.
yardeni.com
Figure 70.Figure 70.
- Market Cap -
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Yardeni Research, Inc.
Figure 71.
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20105
10
15
20
25
30
35
5
10
15
20
25
30
35
9/23
S&P 500 SECTORS(as a percent of total S&P 500 market capitalization, weekly)
Health CareFinancialsIndustrials
Consumer Staples +Consumer Discretionary
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
10
20
30
40
50
0
10
20
30
40
50
9/23
Information Technology +Telecommunications Services
Information Technology
TelecommunicationsServices
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20101
3
5
7
9
11
13
15
17
19
1
3
5
7
9
11
13
15
17
19
9/23
Energy
Utilities
Materials yardeni.com
Source: Standard & Poor’s Corporation.
- S&P 500 Sector Shares -
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Yardeni Research, Inc.
Figure 72.
85 87 89 91 93 95 97 99 01 03 05 07 09 11 130
5
10
15
20
Sep
CONSUMER DISCRETIONARY(percent)
Capitalization Share
Earnings Share*
85 87 89 91 93 95 97 99 01 03 05 07 09 11 135
10
15
20
25
Sep
INDUSTRIALS
85 87 89 91 93 95 97 99 01 03 05 07 09 11 135
10
15
20
Sep
CONSUMER STAPLES
85 87 89 91 93 95 97 99 01 03 05 07 09 11 135
10
15
20
25
30
35
40
Sep
INFORMATION TECHNOLOGY
85 87 89 91 93 95 97 99 01 03 05 07 09 11 130
5
10
15
20
25
Sep
ENERGY
85 87 89 91 93 95 97 99 01 03 05 07 09 11 130
2
4
6
8
10
12
Sep
MATERIALS
85 87 89 91 93 95 97 99 01 03 05 07 09 11 130
10
20
30
Sep
FINANCIALS
85 87 89 91 93 95 97 99 01 03 05 07 09 11 132
4
6
8
10
12
Sep
TELECOMMUNICATIONS SERVICES
85 87 89 91 93 95 97 99 01 03 05 07 09 11 135
10
15
20
Sep
HEALTH CARE
* Using consensus 12-month forward earnings forecasts. May 2003 swings attributable mostly to index composition changes. Source: Thomson Financial.
85 87 89 91 93 95 97 99 01 03 05 07 09 11 130
5
10
15
20
Sep
UTILITIES
yardeni.com
- S&P 500 Sector Shares -
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Yardeni Research, Inc.
-40
-20
0
20
40
15.6
Figure 73.S&P 500 LargeCap
All Sectors
-40
-20
0
20
40
26.0
S&P 400 MidCap
-40
-20
0
20
40
17.0
S&P 600 SmallCap
-40
-20
0
20
40
60
25.2ConsumerDiscretionary
-40
-20
0
20
40
6044.6
-40
-20
0
20
40
6046.2
-20
-10
0
10
20
30
5.5ConsumerStaples
-20
-10
0
10
20
30
13.7
-20
-10
0
10
20
3026.3
-40
-20
0
20
40
60
80
5.3Energy
-40
-20
0
20
40
60
80
53.1
-40
-20
0
20
40
60
80
43.3
-60
-40
-20
0
20
40
16.4
Financials
-60
-40
-20
0
20
40
1.9
-60
-40
-20
0
20
40
-12.5
-30-20-10
010203040
6.9Health Care
-30-20-10
010203040
25.0
-30-20-10
010203040
13.8
-40
-20
0
20
40
11.3
Industrials
-40
-20
0
20
40
20.4
-40
-20
0
20
40
9.3
-40
-20
0
20
40
60
43.0
InformationTechnology
-40
-20
0
20
40
6047.3
-40
-20
0
20
40
60
42.1
-60
-40
-20
0
20
40
60
33.7
Materials
-60
-40
-20
0
20
40
6042.1
-60
-40
-20
0
20
40
60
33.5
-80
-60
-40
-20
0
20
-3.6
TelecomServices
-80
-60
-40
-20
0
206.3
-80
-60
-40
-20
0
20
-44.5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2009
-30
-20
-10
0
10
20
.4
Utilities
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2009
-30
-20
-10
0
10
20
6.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2009
-30
-20
-10
0
10
20
-4.5
yardeni.com
- S&P 500/400/600 YTD -
Page 48 / September 28, 2009 / Strategist’s Handbook www.yardeni.com
Yardeni Research, Inc.
Figure 74.
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1210
20
30
40
50
60
70
80
90
Sep
CONSUMER DISCRETIONARY(billions of dollars)
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1220
40
60
80
100
120
Sep
INDUSTRIALS
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1230
40
50
60
70
80
90
SepCONSUMER STAPLES
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1220
40
60
80
100
120
140
Sep
INFORMATION TECHNOLOGY
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1210
40
70
100
130
160
190
220
Sep
ENERGY
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1210
15
20
25
30
35
Sep
MATERIALS
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1240
70
100
130
160
190
220
250
Sep
FINANCIALS
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1215
20
25
30
35
40
Sep
TELECOMMUNICATION SERVICES
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1220
40
60
80
100
120
SepHEALTH CARE
Source: Thomson Financial.
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1210
15
20
25
30
35
Sep
UTILITIES
yardeni.com
- S&P 500 Sectors Total Forward Earnings -
Page 49 / September 28, 2009 / Strategist’s Handbook www.yardeni.com
Yardeni Research, Inc.
