(Bloomberg News) The rout that erased $2.9 trillion from U.S. equities has pushed valuations in the Standard & Poor's 500 Index 25 percent below the average level from the last nine recessions, even as profit estimates fall.

Companies in the benchmark gauge for American equities trade at 10.2 times 2012 forecast earnings, compared with the average in economic contractions since 1957 of 13.7, according to data compiled by Bloomberg. At the same time, analysts have cut projections for profits next year by 2.6 percent to $110.78 a share, the biggest eight-week drop since 2009, the data show.

Bears say analysts have just started paring earnings estimates and that shares will prove expensive when gross domestic product shrinks. Bulls say stock prices have fallen so much that even should earnings fail to increase in 2012, equities are inexpensive.

"What you're seeing is a growth scare," Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a telephone interview on Sept. 29. His firm oversaw $643 billion as of Aug. 31. "The question is, how much of that is priced in. I'd say that if we don't have a double-dip recession, if earnings just stay flat, these valuations are reasonable. The market already expects those downgrades."
Chinese Manufacturing

The S&P 500 fell 0.3 percent to 1,128.64 at 9:43 a.m. in New York. The U.S. benchmark gauge slipped 0.4 percent last week, extending its decline since July 22 to 16 percent, after reports showing Chinese manufacturing shrank and retail sales in Germany slumped fueled concern global growth is slowing. The index had climbed 67 percent since March 2009, with 455 of its members higher than their level at the bottom of the bear market.

Concern Europe's debt crisis will trigger a global recession spurred investors to seek safety in the dollar and Treasuries during the third quarter. The U.S. currency's 5.7 percent increase was topped only by U.S. bonds, which rallied 6.4 percent, according to Bank of America Merrill Lynch's U.S. Treasury Master Index data. The S&P 500 tumbled 14 percent, the most since 2008, and the S&P GSCI Total Return Index of commodities lost 12 percent.

Analysts have slashed forecasts for 2012 earnings to the lowest level since April, data compiled by Bloomberg show. Projections have been falling for companies from JPMorgan Chase & Co. (JPM) to Caterpillar Inc. (CAT) since S&P stripped the U.S. of its AAA credit rating on Aug. 5.
Credit Crisis

The downgrades will get worse, according to Thomas O'Halloran, a Jersey City, New Jersey-based money manager at Lord Abbett & Co., which oversaw about $114 billion as of June 30. O'Halloran said profits will decrease by at least 15 percent in 2012 from this year. The average forecast of Wall Street analysts shows earnings will climb 17 percent to a record $99.17 a share this year and increase in 2012, data compiled by Bloomberg show.

Analysts underestimated the credit crisis that began in 2007 and cut forecasts throughout 2008 when the economy contracted. The reduction in profit estimates didn't end until May 2009, two months after the benchmark sank to a 12-year low, Bloomberg data show.

"The sovereign-debt crisis is more scary than the private- bank crisis, because the sovereign can backstop the private sector but there is nobody to backstop the sovereign," O'Halloran wrote in an e-mail on Sept. 28. "We're in an environment where the macro is terrible. That would be the underlining reason why the market could have further downside."
Recession Looms