Lots of Smoke but No Fire

On August 4 I was convinced analyst revisions would tumble for the S&P 500 ($SPX) and we would soon see 950 in the index. The markets should have crashed by now, but it hasn’t happened.

The market is telling us that it needs to see estimates fall lower, but perhaps we are already near some level of equilibrium in value. While some degree of negative estimate revisions are in order, I do not expect anything close to the decline suggested by Morgan Stanley’s strategist.

Take a look at recent analyst revision trends in the table below — roughly 39 days past the initial August 4, 2011 volatility spike ($VIX):

Now take a look at analyst revision trends that followed 39 days past the initial September 29, 2008 volatility spike that led markets lower into March 2009:

Analysts have had plenty of opportunity to take down estimates since the initial volatility spike on August 4. To date, there has been nowhere near to the level of estimate revisions seen for the same period in 2008.

The risk of significant EPS estimate revisions seem much lower relative to 2008. As a result, the current S&P 500 PE multiple of 11.7x does seem realistic, below the 3yr average PE of 13.6x with risk perhaps to 10x EPS.

If we do see a spike lower to 10x the 2011 the Capital IQ consensus low EPS estimate of $95.84, it’s probably likely going to be short lived.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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