Author: Joseph Agresti
Covestor model: China & India
Earnings expectations for the S&P 500 were about $97.05 coming into the annual earnings season for 2011. (Fourth quarter reports for 2011 have been released in recent weeks.) We are more than halfway through and I will assume that earnings will be at least $100.
Historically the market price-to- earnings ratio has averaged 16.5 since the 1920’s. We are currently trading at roughly 14 times earnings and given the current low interest rate environment I believe we should be trading at the 16.5 multiple.
If we were to trade at that multiple there may be substantial upside remaining for the rest of the year. We have seen the famous “golden cross” of the 50 day moving average crossing the 200 day moving average.
This simple sign suggests that the era of depressed values that we have seen since the economic recession is over. We are entering a new normal where multiples will revert back to their historical mean. I am long the market and will look to exploit opportunities in the retail sector.
