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.