Would You Buy the S&P 500 at 25x Earnings??

Would You Buy the S&P 500 at 25x Earnings?
Certainly markets have seen booms in which the broad indexes sold at PE ratios in the mid-twenties and higher, but those were better times. In early 2007 when the S&P 500 was trading at 1400, analysts estimates for 2008 S&P earnings stood at $92. This created a relatively mild PE (price-to-earnings) ratio of around 15. By early 2008, earnings estimates for the S&P 500 had slipped to $72 while the S&P remained at around 1300, a ratio of about 18. At the end the third quarter 2008, analysts estimates for earnings had fallen all the way to $60 but the PE ratio remained at 18 as the S&P fell to nearly 1100.

But what about 2009 earnings?
Current analyst estimates for 2009 earnings for the S&P 500 have fallen to just $42!!! That is down almost 50% from what analysts predicted as recently of March of last year. So the future PE ratio for the S&P 500 at today's close of 935 is more than 22 and climbing!

In just the last 3 months analysts have slashed their predictions for 2009 earnings by more than 13%. In fact analyst estimates for 2009 have dropped by more than 13% in each of the last 3 quarters. If the first quarter of 2009 stays true to the pattern, look for estimates to drop below 36. At today's price this would represent a PE ratio of 26!

Don't expect a major sustained rally until expectations for earnings improve materially. And that may be a while.