PE Ratios About to Normalize – And Be Too High

We had negative quarters in the S&P on 2008 which made the PE ratio skyrocket to ridiculous levels. The trailing-twelve-month (TTM) earnings had to deal with negative quarters, until now: the last negative quarter was 4Q08, and it is about to drop out of the TTM calculation. Since almost all S&P companies have reported (99%), we can pretty well estimate the new TTM PE ratio for the S&P: 22. This is still high historically.

The market is looking at estimated forward twelve month (FTM) numbers, which have the S&P at around a 14 FTM PE. Yardeni expects earnings to grow from around $75 to close to $100 per share across the S&P in 2011, which would push the market towards Sp1350 at year end 2010. Still, dividends are lower than normal, down almost 10% YoY. S&P companies are sitting on cash, which in normal times would depress future growth, and earnings. Instead, if we get a recovery, they may increase dividends, sprucing returns to investors.

The Pragmatic Capitalist gives us a handy chart to estimate the S&P at more normal PE ratios:

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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