Mar 2, 2009

S&P 500 Earnings for 4Q 2008

S&P publishes an excel file with total earnings per share for all the companies in the index. Currently, 93% of companies have reported their 4Q 2008 numbers, and the total EPS for the index is: -$11.97. That is to say, if you added up the earnings of every company in the index, there were enough losers to counteract the winners and the group lost money as a whole. Earnings for the year will be $39.73. However, the Wall Street Journal claims this is misleading. Although the index itself is market-cap weighted (larger firms have more impact on the index), the published EPS is equally weighted across all firms. S&P takes earnings from every firm and adds them up, so a dollar of EPS from Abbot Labs counts as much as a dollar from Zimmer Holdings. The Journal argues that since an investor doesn't hold every stock in the index in equal amounts, each firm's EPS should be weighted by its proportion in the index. If you adjust 2008 earnings this way, you arrive at $71.10 for the year. If you are trying to determine if the market is over- or under-valued based on a P/E ratio, it makes a big difference if you use $39 or $71 for the E.

I think both methods are useful. Consider the following scenario with only two stocks in the index:

S&P's method of calculating aggregate EPS is informative for the health and total earnings of the entire index, or economy as a whole. The Journal's method of weighted earnings is useful for an investor who wholds the index, since it better represents his share of earnings based on his proportional ownership in the companies.

No comments: