Preface from dshort: Chris Turner is best known to readers of this website for his monthly Forecasting the Market thought experiment based on Standard & Poor's earnings estimates. Over the weekend Chris emailed me the chart below with a few bullet points.

I noticed today a CNBC piece warning that Stocks May Not Be as Cheap As Many Pros Think. With the CNBC item as an appropriate context, I'm pleased to share Chris's email.

 

 

I took the S&P quarterly closes and overlaid the 3, 2, 1 yr averages of four-quarter earnings. I think it's instructive in that "normalized" earnings should be somewhere around $65.00. The yellow portion is the forecasted earnings and S&P quarterly close (around 1200 is the best guess).

Here are a few takeaways:

• The $65.00 approximate 3-year average earnings coincides with the long-term historical y-o-y earnings growth.
  
  
• "Irrational Exuberance" and easy money post-1995 rapidly inflated the S&P 500 price without associated earnings growth.
  
  
• Dot Com burst - earnings continued up while market declined (from extended overvaluation).
  
  
• 2002: earnings (1 yr) turned up before market.
  
  
• 2007: earnings (1 yr) turned down with market.
  
  
• Increasing amplitude of fluctuations above and below mean display Fed Monetary policy distortions (getting worse, by the way).
  
  
• Earnings will either rapidly fall off next year or the market will skyrocket to stay ahead of forecasted earnings (I'll take the under).

In the months ahead, this would be a chart to review to see the "forecast" back then and compare with what really happened.