Tag Archives: Profit Margin

Robert Shiller’s S&P 500 Forecast for 2020: Is He Overly Optimistic?

Robert Shiller was on CNBC New Year’s Eve to make his forecast for the S&P 500 index in 2020.  His best guess is a 1430 level which works out to 14% price appreciation over the next ten years or 1.3% annually. Taking no issue with the P/E multiple he uses but only analyzing the earning forecast I believe he may be slightly optimistic. He arrives at the 1430 level as follows:

  • Real earnings in 2020 are 78.20 per share. He is assuming real earnings growth of 1.5% per year which is the long-term average.
  • CAPE (cyclically adjusted price earnings) or PE10 ratio of 15. This is the 1890-1990 average P/E. He excludes the “bubble” years of 1990-2010 which would inflate the average P/E to 16.
  • Annual inflation of 2%
  • Result is a 1430 level on the S&P.

This is hardly an overwhelmingly optimistic forecast but Read more of this post


Chicago PMI Highest Level Since April: Indicates Margin Pressure

The Chicago PMI released today came in at 62.5 (vs 60.6 prior and 61.0 consensus) which is the highest level since April.

PMI Components (via zerohedge):

  • Employment: 56.3 vs. Prev. 54.6
  • New Orders: 67.2 vs. Prev. 65.0, highest since May 2007
  • Prices Paid: 70.7 vs. Prev. 68.9, highest since April 2010
  • Production: 71.3 vs. Prev. 69.8, highest since April 2005

This is a mostly positive and better than expected report except for input prices that continue to rise. This indicates margin compression as it is obvious from CPI data that these higher prices are not being passed on to the end consumer.

More on the PMI from Econoday.

Corporate Profits: What the Current Level Tells Us About S&P 500 Returns Over the Next Five Years

Last week, in his weekly market comment, John Hussman posted an interesting chart (see below) comparing the corporate profit to GDP ratio and the subsequent growth rate in corporate profits. I have previously posted on profit margins (see here and here) and will now further explore what profits margins at current levels imply about the next five years for the S&P 500 index.

But first a question: why is the current level of corporate profit margins so important?

When looking at the market through a P/E (Price divided by earnings) framework it becomes obvious that any price appreciation, by definition, must come from an expansion in the P/E multiple, an increase in earnings or both. Experts disagree on what, exactly cause an expansion or contraction in the P/E multiple but the general consensus is that it is due to the level of inflation, interest rates, investor sentiment or a combination of the three. Read more of this post

Assets Returns Since QE2 Hints

A very nice interactive tool today from Reuters that shows asset returns based on different QE2 related time periods. Link.

Notice how most assets rallied from the Jackson Hole speech until the official QE2 announcement and the USD declined. Since the actual announcement risk assets have sold off and the USD has rallied. Interesting that the anticipation QE resulted in assets moving as the Fed intended, higher equity prices and lower bond yields, but since implementation prices are moving in the opposite direction. The question is, will this continue?

Click to Enlarge

Click to Enlarge


More on Profit Margins

An update to last week’s look at how QE2 may impact corporate profit margins.

First, a chart of S&P 500 revenues and profits. This view complements the profit margin chart from last week.   Profit has recovered to within 10% of the all-time peak but revenue has only recovered to 15% of peak. Demand remains relatively weak with some of the rebound in profit due to the significant cost cutting done by major corporations.

Read more of this post