I've heard various estimates of their current aggregate P/E, but the average estimates are around 100 (if this is inaccurate, please point me to a data source). That's still about 5x or more the long-term historical average. So should we be surprised if the Nasdaq index springs back to that historical average and falls to 400?
The flaw in this reasoning stems from the projection that because a "standard" P/E ratio for a stock is considered to be 20, that the market as a whole should trade at that level. The problem is that this makes no provision for companies that are losing money, a group which currently makes up almost half of the Nasdaq listings. In fact, among Nasdaq listed companies showing a profit, less than 2% trade at P/E ratios of 100 or more. To make the "aggregate market" trade at 20 times earnings, I estimate profitable companies would have to trade at an average of about 7 times earnings, to make up for their money-losing bretheren who, through no fault of their own, do not trade at a negative share price.
Put another way, the CSCOs and INTCs have been quite severely in their own right over the past year. Is it reasonable to punish them further every time a money-hungry underwriter foists an ALGN (earnings of negative $43.26/share) on the market, thus further depresssing "aggregate earnings"?
The only way we can reduce the "aggregate P/E" of the Nasdaq to a non-eye-popping level is to weed out (delist) companies that are losing money and have little prospect of ever doing so. This process is finally getting underway in earnest, and IMO it can continue with relatively little damage (relative, that is, to your scenario of an 80-95% decline even from this level) to the overall averages. |
