Thursday, September 9, 2010

Doing The Valuation Math

As the thank-goodness-we-aren't-headed-into-a-double-dip-recession-or-deflation relief rally continues, perhaps a quick look at the valuation math for the US equity markets might be helpful.

As the accompanying table illustrates, the three likely near term scenarios with expected earnings and prospective P/E ratios provide a useful valuation guide. I have bracketed the most likely P/E ratio for each prospective forward 12 month earnings scenario (mid 2011). (Obviously, an above average P/E for the doomsville scenario makes little sense.)

As I describe in the equity analysis classes that I teach every fall, the math is fairly easy. Getting the inputs correct is the hard part.

Note: even more difficult is getting the inputs correct for the right reasons!

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