How We Value The Stock Market
I've been asked how we get a possible year end target of 1,250-1,350 on the S&P 500? Here's how we do that analysis. First off we have to ask a simple question at this point which is whether the economy is improving or listing back towards either stagnation or recession. Our analysis is that we are still improving although certain headwinds (Greece for example) have recently been added to the mix. An improving economy is likely an expanding multiple event. Current analysis indicates that the S&P 500 should earn somewhere between $75-79 per share this year and possibly $79-84 in 2011. {There however is a fear by some that the US economy could slip back into recession either later this year or in 2011. That however is not our current read of the economy}.
So let's take these numbers and apply some sort of PE multiple to them {Top Row}. Remember that at some point this year Wall Street will start focusing on 2011's numbers. I've highlighted in Green the range based on several of S&P's earnings estimates that I think its possible to see by year end based on what we know today. I apologize that this worksheet doesn't show up better on the blog. Folks who do this all day long can likely make this appear better, but it's not my day job!
PE Ratio
14 15 16 17
14 15 16 17
75: 1050 1125 1200 1275
76: 1064 1140 1216 1292
77: 1078 1155 1232 1309
78: 1092 1170 1248 1326
79: 1106 1185 1264 1343
80: 1120 1200 1280 1360
81: 1134 1215 1296 1377
82: 1148 1230 1312 1394
83: 1162 1245 1328 1411
84: 1176 1260 1344 1428
A final note: Like the market's themselves this sort of analysis is always a work in progress and gets constantly revised. This is simply a snapshot of where I think we are today. If I had to guess today I would think we might trade at the lower level of that range by year end, say 1250-1275. Obviously if we start revising these earnings numbers down then it is likely that our year end targets would have to be revised down for the markets as well. That of course works both ways! A market that looks to do substantially better than current analysis suggests could go even higher.
By the way, a market that trades say around 1,300 by year end would only take us back to where we traded in the summer months of 2008!
*Long ETFs related to the S&P 500 in client accounts.
76: 1064 1140 1216 1292
77: 1078 1155 1232 1309
78: 1092 1170 1248 1326
79: 1106 1185 1264 1343
80: 1120 1200 1280 1360
81: 1134 1215 1296 1377
82: 1148 1230 1312 1394
83: 1162 1245 1328 1411
84: 1176 1260 1344 1428
A final note: Like the market's themselves this sort of analysis is always a work in progress and gets constantly revised. This is simply a snapshot of where I think we are today. If I had to guess today I would think we might trade at the lower level of that range by year end, say 1250-1275. Obviously if we start revising these earnings numbers down then it is likely that our year end targets would have to be revised down for the markets as well. That of course works both ways! A market that looks to do substantially better than current analysis suggests could go even higher.
By the way, a market that trades say around 1,300 by year end would only take us back to where we traded in the summer months of 2008!
*Long ETFs related to the S&P 500 in client accounts.
posted by CR English at 7:09 AM
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