Buyer Beware?

December 12, 2012 | Nat Kellogg, CFA, President

Our Chart of the Week looks at analyst expectations for 2013 S&P 500 operating earnings. This is a “bottoms-up” estimate which means it is based on earnings expectations for each of the 500 underlying companies in the S&P 500 index.

The S&P 500 index closed last night at 1427.84 and the consensus estimate for 2012 S&P 500 operating earnings is $103.92. This means the current market P/E (price/earnings) multiple is 13.7. Assuming that the current estimate of $114.81 for 2013 is accurate, and assuming no change in the market multiple, this implies a 2013 year-end value for the S&P of 1576 and a total return for equity investors of 12.8% (10.5% price appreciation plus a 2.3% dividend yield).

While this sounds attractive, the prediction above relies heavily on analysts’ 2013 earnings estimates for S&P 500 companies. But as the chart shows, analysts have consistently lowered their expectations for 2013 earnings over the course of the year. After peaking at $119.02 on May 1st earnings expectations have dropped 3.5% and have been falling steadily. Should this trend continue, it not only implies a lower year end value for the S&P 500, but earnings growth expectations are also falling. For investors, these patterns may result in lower than expected equity market returns in 2013.

Nat Kellogg, CFA
President

Get to Know Nat

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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