The valuation of earnings for 2009 require a substantial drop

A long term chart that I will try to publish next days suggests what I have repeatedly told in my blog. Referring to trailing profits and the current assumption of $73, (that's a positive assumption) for 2008 the level we should see to mark a 'value low' would be around 8 times those earnings hence roughly around 600 SPX. Going forward, if the scenario's of GOLDMAN and MER become true (which I in this case do support) around 55-60 area, the markets should even drop at some point to 450-500 later in 2009. All big economic contractions had as an inevitable consequence a contraction of the PE to or even below 8 times. The problem even might be that the contraction of earnings might even be deeper as the fallout from the Wall Street leveraged balance sheets rather asks for a much steeper contraction as losses will be much higher than the current $1 tril. it could easily get a double digit tril. number. The risk is rather that at a given point the governments will not be able to cover the losses and default as well. We will look into that going forward, but in much older blogs I already gathered some calculations.

Excerpt Barron's:

And, once again, they have cut their forecasts, both for the fourth quarter and thus the full year, as well as for 2009. As a result, they now estimate earnings for the Standard & Poor's 500 index will decline in 2008 for the second straight year. Yet these Street analysts still cling to the hopes for a profits revival next year.

A poll of industry analysts by Thomson Reuters shows that the Street expects earnings to remain almost flat in the current quarter, resulting in a decline of 12% for all of 2008, to $73.32 a share. That would follow the 3.5% drop in S&P 500 earnings in 2007.

In 2009, they see S&P 500 profits rising 6%. While that forecast is vastly more modest than the 22% gains for 2009 analysts forecast three months ago, some investment pros are skeptical of even these dampened expectations and anticipate earnings to fall for a third straight year.

So far this quarter, earnings preannouncements by companies have been unfavorable. With 116 companies announcing bad news, the ratio is running four negative announcements to one positive -- twice the normal ratio.

There may some relative bright spots ahead in 2009. Health care, consumer staples and utilities remain the farthest removed from the financial and economic turmoil, and should generate steady albeit modest profit growth.

Merrill Lynch forecasts a 7% drop in S&P profits to $60 a share in 2009. And, Goldman Sachs expects operating earnings to slip 33% this year to $55 a share and fall 5% next year.

Cumulative estimates from industry analysts at Standard & Poor's however, expect S&P 500 profits to rise 25% from $70 a share in 2008 to $83.85 a share in 2009.