Vision - March 2009 - (Page 7) earnings and what we think 2009 earnings will be. Since 1871, the P/E ratio has averaged roughly 15. Since WWII the P/E ratio has averaged a bit over 16 and over the last 30 years, the P/E ratio has averaged 19 as we’ve seen this multiple expand over the past century. The matrix below shows P/E ratios by earnings for the S&P 500 Index and the values represent the potential value of the index given a certain P/E ratio and earnings estimate. For example, if 2009 earnings for the S&P 500 come in at $45 and investors are only willing to pay six times those earnings, we would expect the S&P 500 to trade at around 270 in December. With the S&P 500 currently trading around 850, the highlighted cells in the matrix show what the market is thinking about earnings and what multiple they are willing to pay for those earnings. The bottom-up estimate for S&P 500 earnings is currently $75 for 2009 which is far too high. I currently estimate 2009 earnings will be around $55 and by December the market will pay about 18 times those earn- S&P 500 Earnings S&P500 P/E Ratio 45 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Source: CEA 270 315 360 405 450 495 540 585 630 675 720 765 810 855 900 50 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 55 330 385 440 495 550 605 660 715 770 825 880 935 990 1045 1100 60 360 420 480 540 600 660 720 780 840 900 960 1020 1080 1140 1200 65 390 455 520 585 650 715 780 845 910 975 1040 1105 1170 1235 1300 70 420 490 560 630 700 770 840 910 980 1050 1120 1190 1260 1330 1400 75 450 525 600 675 750 825 900 975 1050 1125 1200 1275 1350 1425 1500 80 480 560 640 720 800 880 960 1040 1120 1200 1280 1360 1440 1520 1600 85 510 595 680 765 850 935 1020 1105 1190 1275 1360 1445 1530 1615 1700 ings—giving us a value of roughly 1000 for the S&P 500 by the close of 2009—an 18 percent lift of the 850 we stand at now. This would represent an increase of about 30 percent off the bottom we saw in Novem- ber—nearly equivalent to what happened coming out of the last bear market. I pray that the bottom is behind us. Only time will tell, but the process has begun. • www.ce.org March/April 2009 7 http://www.myGreenElectronics.org http://www.myGreenElectronics.org
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