Second Update On S&P Forecast

Earlier this year, I attempted to predict the level where the S&P 500 index would settle in 2009. I was not explicit in regard to the amount of time the market would trade in a particular range, so I'll claim victory if the market reaches my predicted range and trades there for a week or so. If you recall, that range was 600-640.

On Valentine's Day, I provided the first update on my prediction. Today is Memorial Day, so I'll provide my second update.

As you may recall, the market bottomed on March 9, with the S&P hitting a low of 666.79; we've been on a big rally since then climbing back above 900 before settling back to 887. Where do we go from here?

Let's revisit the S&P earnings forecast which we've reviewed before in this analysis. The below chart shows the quarterly earnings estimates for Q4 2008 through Q4 2009 as they stood back in February in comparison to today. The updated data is available here.


As you can see, the estimates for 2009 are even worse than they were in February. (If you recall, the February estimates were much worse than January.) The 2009 estimates are now at $54.15 which is just below the bottom of my range provided in January. I think we may begin to see some stabilization unless the economy gets even worse - unfortunately, this may still happen.

The real question now rests with how the market will price these earnings in terms of the P/E ratio. At the end of March, the P/E stood at 18.6 which still seems too high to me. Alas, I am not an expert (consider that a disclaimer), so we will see how the market moves between now and my next update on Independence Day.