Cooperman says that the market is fairly but fully valued
Leon Cooperman indicated that at the current multiples, the market is fairly but fully valued. The S&P 500 index’s (SPY) current PE (price-to-earnings) multiple is at 20.45x and the forward estimated PE multiple is around 18.53x. Currently, the S&P 500 index (SPXL) is trading at 2,179.98 as of September 2, 2016. The all-time high is around 2,190.15. Currently, the S&P 500 index is 0.5% below its all-time high.
In the falling earnings scenario, the S&P 500 index level was steady compared to a steep fall in earnings. The above graph shows the movement of the S&P 500 index versus its 12-month trailing earnings. The S&P 500 index (SPY) rallied during the earnings contraction in the hope of better earnings in the future. Therefore, prices have already discounted future earnings growth.
What do the earnings indicate?
In the last seven quarters including 2Q16, the S&P 500 index’s trailing 12-month earnings per share growth contracted. The major fall in the earnings came from sectors with exposure to the commodity (DBC) and energy sectors. Industrial metals (XLI), energy (XLE), and commodities witnessed a huge fall due to the supply glut and stronger dollar (UUP). Lower commodity prices translate to lower earnings. However, a sector such as the non-energy sector expanded earnings in the last few quarters. In Is the Earnings Recession Ending in the United States? we saw that we have been in an earnings recession for the last six quarters. Now, the earnings recession is making its bottom. This is already discounted in the prices.
In the next part of this series, we’ll analyze Leon Cooperman’s stance on the hedge fund industry.