Rather, I'm going to make a case for why the S&P 500 Index has been leveling out around the 1,250 level and explain why getting in the market below that makes sense. I don't know about you but my mattress has been getting awfully lumpy lately.
When all is said and done in Europe, investors will once again return to corporate earnings as their gauge of stock market performance. What the latest earnings estimates from analysts are telling me is that most are seeing weak growth through the remainder of the year and then stronger performance next year. When analysts are uncertain about growth prospects, they simply use a simple straight line assumption which appears to be the case next year. I'm far less certain.
But for the sake of simplicity, I'm using a conservative $83 per share annual earnings estimate for consolidated S&P 500 index components. (The consensus is $91.59) My estimate assumes significant global economic deterioration in the current quarter followed by stagnancy or tepid recovery next year. I'm obviously more bearish than the consensus, but I don't see us returning to grow rates above 2-3% anytime soon.
So getting back to the 1,250 pivot point. Why is the market going to turn around this point? Based on my conservative earnings estimate, this is the level where the market's P/E ratio (price to earnings) is at its historical mean (~15). Meaning historically, the market would be cheap under 1,250 and expensive above 1,250.
I had been waiting for the market to drop below the 1000 level to put some more mattress money to work. But I'm considering the worst maybe over and that Italy will be the final shoe to drop in this European debt fiasco. I've got my eye on the 1,150 level now. What to buy then? Check back next time.
