Why The Dow At 10,000 Is Just As Likely As The Dow At 30,000
How excessive is today's bullishness or foolishness?
Well, forget about the Dow at 20K. It is a foregone event/conclusion and it appears that we will never go down. So much so that more and more analysts are talking about the Dow at 30K, 40K, 50K, etc....
Let's take a look at their analysis. Here is the latest.
Here is their basic logic behind the analysis.
- The biggest single factor in the long-term direction of stocks is earnings growth - OK, so far so good.
- The current consensus for S&P 500 Index operating earnings are $133 per share. - Operating earnings, Gaap, non Gaap, adjustments, etc....Who cares. Net earnings are the only earnings that count. And they are not anywhere close to $133. They are at $90 a share today.
- According to the Arora Report’s analysis of Trump's proposals, tax cuts could add about $13 to S&P 500 earnings.- I don't have an opinion about this. It may or may not. No one has seen this tax plan. "Phenomenal" might not mean very much after the legislative branch gets done with it. As was written here.....What If Trump Can’t Get 20% Corporate Tax Rate - But fair enough - I will give them $13.
- Deregulation could add another $7. - I have no idea, but fair enough.
- If gross domestic product growth were to accelerate to 4%, S&P 500 earnings could reach as high as $190 by the end of Trump's first term. That's double the growth we saw in Q4 of 2016. And that is after 8 years of zero interest rates and massive QE. I am not a big believe that the growth will double, let's say that it does.
- Given the potential growth in the economy, in spite of the Federal Reserve’s plan to raise interest rates, the price-to-earnings (P/E) ratio may stay in the range of 18 to 21. Excuse my language, but this is complete garbage. Shiller's adjusted S&P Ratio (a much better measure) is at 29 today. With the median at 16.
Now, the analysis above is about as rosy as it can get. It assumes that everything, and I mean everything, goes right. Very unlikely considering today's openly hostile environment. Also, the analyst forgot to discount the negatives. What about a trade war with China - how will that impact GDP, growth and earnings? What if the S&P earnings continue to decelerate. Etc..... You get the picture.
Let's run our calculations.
- Theirs: A P/E of 20 applied to $190 in earnings leads to 3,800 in S&P 500. (The benchmark index is now at around 2,347.)
- Mine -Optimistic: A P/E of 16 (median) applied to $125 in earnings leads to 2,000 in S&P. Shockingly, that is 15% lower from where we trade today.
- Mine - More Realistic/ Pessimistic (call it what you will): A P/E of 16 (median) applied to $90 in earnings leads to 1,440 in S&P. A haircut of 40%. That would be an equivalent of about 12,000 on the Dow.
And there you go ladies and gentleman. The devil is always in the detail, or in this case, how you interpret recent developments. True, while the Dow can very well end up at 30K by 2021 if everything goes right, it can just as well end up at 12K if everything doesn't "go right".
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