With price/earnings ratios just short of the stratosphere, the stock market must be expecting a tremendous rebound in corporate profits this year. Otherwise, why would the S&P 500 be selling for nearly 48 times last year's earnings?
To be sure, if you go by what the analysts are projecting for 2002, the S&P 500's P/E ratio is "only" 22. But even this is high, considering that its long-term average is a mere 13 times earnings.
If profits don't come through as expected, the fall from these heights could hurt. Luckily, there is a good chance that investors won't be disappointed.
For one thing, the recession seems to be drawing to a close and a recovery is waiting in the wings. See full story on December's 1.2% gain in the leading indicators.
Economists surveyed by CBS.MarketWatch.com think that the economy will expand by 1 percent in the current quarter, following a decline of about that much in the fourth (see Economic Forecast and Calendar).
As you can imagine, when the economy grows, so do sales by businesses. And while pricing power may seem weak now, it is sure to strengthen, once volume picks up.
Don't take my word for this; look at those markets where sales are still strong. For example, sales of new and existing homes are holding up nicely; their prices are rising twice as fast as the overall consumer price index.
In the aggregate, lack of pricing power does not seem to correlate with weak earnings, anyway. The last half of the 1990s is testimony to this, since profits grew quite rapidly even as the overall rate of inflation was the slowest since the early 1960s.
Don't forget productivity as a means of boosting earnings. Once sales pick up, business uses its existing workers and facilities more intensively, so efficiencies rise. This gives a lift to both profits and margins.
On the cost side, you name the cost of doing business and it has been falling. For instance, the cost of labor, businesses' biggest cost, has been plunging like a lead balloon, thanks to the massive layoffs since last March.
Inventories are down as well. Indeed, the reductions in stockpiles by Corporate America last year may well have been the greatest in history.
Needless to say, fewer unsold goods on hand reduce another major cost of doing business -- the cost of financing. This, of course, is in addition to the decline in the cost of borrowing for those firms whose loans are tied to the banks' prime lending rate.
Let us not forget the cost of energy. The drop in gasoline prices alone saved U.S. consumers and business about $50 billion last year. Oil for heating and industrial uses is lower, too.
Finally, year over year comparisons should benefit from the steep decline in profits that got under way toward the end of 2000.
Run, don't walk, away from those firms that can't show gains with this kind of assistance.
(Quelle: cbs.marketwatch.com)
So long,
Calexa
To be sure, if you go by what the analysts are projecting for 2002, the S&P 500's P/E ratio is "only" 22. But even this is high, considering that its long-term average is a mere 13 times earnings.
If profits don't come through as expected, the fall from these heights could hurt. Luckily, there is a good chance that investors won't be disappointed.
For one thing, the recession seems to be drawing to a close and a recovery is waiting in the wings. See full story on December's 1.2% gain in the leading indicators.
Economists surveyed by CBS.MarketWatch.com think that the economy will expand by 1 percent in the current quarter, following a decline of about that much in the fourth (see Economic Forecast and Calendar).
As you can imagine, when the economy grows, so do sales by businesses. And while pricing power may seem weak now, it is sure to strengthen, once volume picks up.
Don't take my word for this; look at those markets where sales are still strong. For example, sales of new and existing homes are holding up nicely; their prices are rising twice as fast as the overall consumer price index.
In the aggregate, lack of pricing power does not seem to correlate with weak earnings, anyway. The last half of the 1990s is testimony to this, since profits grew quite rapidly even as the overall rate of inflation was the slowest since the early 1960s.
Don't forget productivity as a means of boosting earnings. Once sales pick up, business uses its existing workers and facilities more intensively, so efficiencies rise. This gives a lift to both profits and margins.
On the cost side, you name the cost of doing business and it has been falling. For instance, the cost of labor, businesses' biggest cost, has been plunging like a lead balloon, thanks to the massive layoffs since last March.
Inventories are down as well. Indeed, the reductions in stockpiles by Corporate America last year may well have been the greatest in history.
Needless to say, fewer unsold goods on hand reduce another major cost of doing business -- the cost of financing. This, of course, is in addition to the decline in the cost of borrowing for those firms whose loans are tied to the banks' prime lending rate.
Let us not forget the cost of energy. The drop in gasoline prices alone saved U.S. consumers and business about $50 billion last year. Oil for heating and industrial uses is lower, too.
Finally, year over year comparisons should benefit from the steep decline in profits that got under way toward the end of 2000.
Run, don't walk, away from those firms that can't show gains with this kind of assistance.
(Quelle: cbs.marketwatch.com)
So long,
Calexa
