Why I Believe the S&P 500 Is Due to Drop at Least 150 Points
Home » Financial » American Finance » Why I Believe the S&P 500 Is Due to Drop at Least 150 Points

Why I Believe the S&P 500 Is Due to Drop at Least 150 Points

Why I Believe the S&P 500 Is Due to Drop at Least 150 Points

By Sasha Cekerevac for Investment Contrarians | Aug 9, 2013

 

090813_IC_cekerevacMany friends and readers have been asking me about the overall market and when we will see a market correction occur. For simplicity’s sake, let’s use the S&P 500 as a trading vehicle of choice to represent the overall market.

I believe we are close to a top in the S&P 500 and it could drop at least 150 points during the next market correction.

There are several reasons as to how I calculated the extent of the drop and how we are currently very close to the top. The first is that a market is a multiple of earnings—how much people are willing to pay for every dollar of earned income.

Historically, the average for the S&P 500 price-to-earnings (P/E) ratio has been about 15. A market correction occurs when there is a disconnect between the S&P 500 and the underlying fundamentals of the companies. Remember: the market leads the economy, which is exactly what has occurred over the past couple of years.

However, at this point, we are in a situation in which revenues are not growing, profit margins are close to all-time highs, and earnings appear to be stagnating. With the 12-month forward earnings per share for the S&P 500 estimated to be $117.00, this leaves the forward P/E ratio for the S&P 500 at 14.5. (Source: FactSet, August 2, 2013.)

Is that outrageously expensive? No; however, it isn’t cheap. We need to look at where the risks and the potential rewards are to get a better idea of whether or not a market correction is likely.

In terms of rewards, the historic P/E ratio for the S&P 500 again averages around 15. So yes, we could see a slightly higher multiple for the S&P 500. But since earnings are stagnating and revenues are not growing, investors will become more hesitant to pay a premium in that type of environment. In this case, rewards seem limited.

via Why I Believe the S&P 500 Is Due to Drop at Least 150 Points.

Be Sociable, Share!

You must be logged in to post a comment Login

http://ad4.liverail.com/?LR_PUBLISHER_ID=26258&LR_SCHEMA=vast2-vpaid&LR_VERTICAL=preroll&LR_URL=[page_url_macro]&LR_AUTOPLAY=0&LR_CONTENT=6&LR_MUTED=0&LR_VIDEO_ID=[player_videoid_macro]&LR_TITLE=[video_title_macro]