S&P 500 primed for a fall?
Posted
Sep 02 2008, 02:40 PM
by
Kim Peterson
Rating:
Tuesday's "uh-oh" story of the day comes from Bloomberg, which points out that shares of companies making up the S&P 500 Index are trading at 25.8 times profits, the highest valuation in five years. The last time that happened was in 2001, right before the dot-com bubble burst and U.S. companies lost about half their market value.
The problem, according to money managers, is that analysts are too optimistic about profits. Companies won't be able to reach the numbers analysts are predicting, and the high valuations are going to tumble. Analysts have overreached on profit in the last four quarters, according to Bloomberg.
"The fundamentals are going to be poor, earnings are going to be bad, and there are going to be more huge writedowns," money manager Philip Orlando said. "We think stocks probably need to work 5 to 10 percent lower over the next month or two.''
For the S&P 500 companies, analysts are expecting aggregate earnings of $21.69 a share in this current quarter and $24.62 in the fourth quarter. That's 3.9% and 62% higher than last year's third and fourth quarter, respectively. (No, that 62% is not a typo).
But some stocks are trading below the average valuation, including Gap, AK Steel, and Lexmark International. And some investment banks are telling clients to buy stock, expecting an earnings upturn.
