Traders gather around specialist Christopher Gildea, right, at his post on the floor of the New York Stock Exchange Tuesday, May 31, 2011.Richard Drew
S&P 500 stocks are looking cheap, as profits rise and share prices fall, according to an analysis by Bloomberg News.
Standard & Poor's 500 Index companies will earn 18 per cent more this year than in 2010, according to the average estimate of more than 9,000 analysts polled by Bloomberg. Declines since April have pushed the price of the S&P 500 to 14.5 times the past year's earnings, compared with the average of 20.5 since June 1991.
The index is valued at 8.7 times cash flow, cheaper than it has been 81 per cent of the time since 1998.
"Even if companies posted no growth, price-earnings ratios would be lower than on 96 per cent of days in the past two decades," the article points out.
S&P 500 earnings may rise to $99.61 (U.S.) a share in 2011 from $84.58 last year and $61.52 in 2009, according to data compiled by Bloomberg. That's an increase from the forecast of $95.37 on Jan. 3 and $98.70 on April 29.
Should stocks stay at current prices and the analyst predictions come true, the S&P 500 would trade at 12.8 times income on Dec. 31, the lowest level since 1985 except for the six months after Lehman Brothers Holdings Inc.'s bankruptcy in September 2008 and nine months in the late 1980s, according to Bloomberg data.
One point to bear in mind is that margins are extremely high, at about 10 per cent, after aggressive cost-cutting, and that may be unsustainable, according to Joe Weisenthal of Business Insider.
Sonali Verma