The following is an excerpt from Edward Krudy | September 9, 2012 | Reuters.com |
(Reuters) – At the start of the historically weakest month for equities, there are plenty of reasons to believe stocks may be just about reaching a top – at least in the short term.
The S&P 500 has surged 14 percent this year and is at its highest level in more than four years. Not counting 2009 when equities rebounded from crisis lows, this could be the best year for stocks since 2003 – nearly a decade.
A report showing hiring in the United States in August was much slower than expected and warnings last week of a slowdown at Intel and FedEx, that will likely foreshadow a very weak earnings season, have not been enough to deter investors buoyed by aggressive central bank action.
After the European Central Bank’s pledge last week to buy the debt of troubled euro zone countries, the Fed is widely expected to introduce new stimulus measure in the form of more bond buying when it closes its two-day meeting on Thursday.
“Good news is good news and bad news is good news, largely because of the Bernanke put,” said Eric Kuby, chief investment officer at North Star Investment Management in Chicago.
The S&P 500 is now trading at 13.3 times its forward earnings estimates, meaning investors are willing to pay just over $13 for one dollar of expected earnings from S&P 500 companies.
Although that is below a median forward price-to-earnings ratio of 13.7 since 1976 – according to Morgan Stanley – it is close to the upper end of the range in the low-growth, post- crisis era of the last five years. During that time there has been a median price-to-earnings ratio of 12.9, according to Thomson Reuters data.
In fact, the recent price-to-earnings high was 13.5 in February 2011, just above current levels. If you are of the view that little has changed since then, there is no reason for the ratio to go much higher. That combined with a slowing earnings picture inevitably means lower prices.
“Our view is that the next double-digit move in the market is down not up,” Morgan Stanley said in a research note.
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