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Gustav is Gone, The S&P Awaits the Earnings Storm

Written By Brian Hicks

Posted September 2, 2008


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Gustav blew by, the price of oil fell and the markets have gone green for the day. So what is the worry?

Well the markets are a bit like the weather. If you wait long enough they will change too. Tomorrow is another day.

Either way, stocks still look over priced when compared to their earnings power six months out.

Here’s the skinny on that score from Bloomberg.

It is in a story by Michael Tsang and Jeff Kearns entitled: U.S. Stocks at 25.8 Times Profit Means Rally May End

“The best already may be over for the U.S. stock market this year.

The Standard & Poor’s 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world’s 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

Money managers at Federated Investors Inc., Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won’t last because corporate profits will fail to meet analysts’ estimates. Wall Street

forecasters, who were too optimistic about earnings for the past four quarters, predict income at America’s biggest companies will grow by a record 62 percent in the final three months of 2008, according to data compiled by S&P.

“The market is pricing in the expectation of a good quarter, but we just don’t see it,” said Philip Orlando, who helps manage $350 billion as chief equity market strategist at Federated in New York. ‘The fundamentals are going to be poor, earnings are going to be bad, and there are going to be more huge writedowns. We think stocks probably need to work 5 to 10 percent lower over the next month or two.'”

So summer is slipping by and winter is closing in fast.

By the way, the falling price of oil is a good news, bad news story.

It’s only falling because the economy—both here and abroad—is rapidly cooling off. How far it falls now is the $64,000 question.

I’m starting to think it could drop as far $80.