What's the Stock Market Worth Now?
By Jeremy Siegel, Ph.D.
Operating earnings for the S&P 500 Index for 2009 are projected to be about $56.00 per share, which, at current levels of the Index (1070), puts stocks at about 19 times earnings, higher than the long-term historical average of 15.
But basing stock values on 2009 earnings is inappropriate. 2009 marked the bottom of the worst recession since World War II. What is relevant for determining stock values are future earnings, not past earnings. Next year's operating earnings on the S&P 500 Index are projected to be $74.34 a share, marking the index at 14.4 times earnings. And early earnings estimates for 2011 are at $89 a share, puts stocks at about 12 time earnings.
Furthermore, stock values are not based only on 2010 or 2011 earnings but also on earnings in 2012 and beyond. And because of productivity trends , there is good reason to be optimistic about long-term earnings. Productivity growth has been on a tear, increasing at a 6.9 annual rate in the second quarter and a blow-out rate of 9.5 percent in the third quarter. This is the fastest two-quarter rise in productivity in 40 years.
Productivity gains boost profits because productivity measures how much more output can be produced for a given labor input. Since labor costs are the lion's share of most firms' expenditures, raising output through productivity growth means more revenue for given labor costs, and it raises earnings. If rapid productivity growth continues, stocks could quickly surpass their record high $91.73 level reached in 2007 before the recession began.
I've provided only a short excerpt out of an article with several more bullish acceptable economic measurements.
Should we accept this? The market is about to sky rocket, Wall-Street and CEO-s are about to bask in huge financial glory again on the backs of the 10+ percent unemployed?
Don't bet the farm on it. Yes - unemployment is an issue, and with high unemployment consumer recovery is in doubt. The first stage out of the massive recession is inventory replenishment. We are witnessing that. In a good scenario, this will start a snow ball rolling of profits for the big corporations who would in turn rehire to keep up with demand. Which will then restart the private consumer appetite.
On the bad scenario... well - try watching Fox-News at 5PM eastern. See how you feel about the market and the economy after that. Not accepting or endorsing any point of view, simply stating that it's there.