The ratio averaged 17.4 during the nine rallies and ended at about 19.9. Reaching the mean level would require a 26 percent gain in the S&P 500, holding earnings constant, data compiled by Bloomberg show. Should profits meet analysts’ 2013 projection, the index would need a 42 percent gain from the Nov. 16 closing price. Earnings are forecast to climb to a record $110.80 a share next year, almost double what companies posted in 2008, analyst estimates compiled by Bloomberg show.
“Valuations are cheap given what we’ve seen in earnings,” said Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania. His firm oversees $6.5 billion in assets. “Corporate America is strong, balance sheets are exceptionally strong and flush with cash. We do not believe we’ll have a contraction in earnings next year. We expect profit growth to re-accelerate in the second half of 2013.”
Apple, which has fallen 25 percent from its high of $702.10 on Sept. 19 traded at 11.9 times reported profits, a 14 percent discount to its five-year average, data compiled by Bloomberg show. The ratio reached a record 23.3 times income 2 1/2 years ago, even after the Cupertino, California-based company posted record earnings in the first quarter.
Profits for Dollar Tree, which sells everything from toys to pet food for $1 or less, will rise 24 percent in fiscal 2013, ending in January, and 13 percent the next year, according to analyst estimates. While the shares have almost tripled since March 2009, the price-earnings ratio at 16.7 is 21 percent below the five-year average.
Southwest Airlines Co. trades 22 percent below its historic valuation, even though earnings at the Dallas-based company have surpassed analyst projections for the past five quarters and are forecast to rise 65 percent in 2013. The shares are up 4.3 percent in 2012.
Of the 500 companies in the index, 245 have price-earnings ratios below their five-year means, data compiled by Bloomberg show. That’s up from 196 at this time last year and 174 two years ago, the data show.
Bull markets “normally finish with a real burst of hyper enthusiasm,” Michael Shaoul, chairman of New York-based Marketfield Asset Management, which oversees $3.5 billion, said in a phone interview. “We haven’t seen the beginning of that yet. The transition from tepid enthusiasm to hyper enthusiasm is going to be worth few hundred points in the S&P.”