“Wall Street is one of the few places where practice does not make perfect,” according to a Bianco Research presentation posted at The Big Picture blog.
“If the economy goes into recession, earnings forecasts are not 10% to 12% too high. Instead they might be 20% to 40% too high. In other words, if the economy goes into recession, the earnings forecasts are horribly wrong,” Bianco states. “They might be so wrong that one can make the case that the market might be overvalued. We believe this is part of what is bothering the markets, the epiphany that the economy is much weaker than expected and a recession will blow a hole in earnings forecasts to the point that the market might not be cheap anymore.”
Bloomberg reported the rout in stocks has pushed S&P 500 valuations 25% below the average level from the last nine recessions as profit estimates fall with stock prices. Companies in the blue-chip index are trading at just above 10 times 2012 forecast earnings, according to the report. [Stock ETF Sell-Off Attracts Value Investors]
iShares S&P 500
