S&P 500

I thought we'd look at the S&P 500 today since markets have seen their worst two day performance in a couple of months.  We're going to look @ its ETF equivalent SPY.  It's trading about 1% higher then when we last looked at it about a month ago.   Here goes.

SPY is trading above its trend line and all of its major moving averages.  It is overbought by our work in all three of the timeframes we follow.  Note however that it has been overbought for a couple of months and markets can stay overbought or oversold for longer periods of time then most investors think.  

S& P 500 four quarter forward earnings-which given the time of year we're in also corresponds to year end 2014 earnings- are now at a record high $120.74.  While I haven't settled in on next year's number, I'm leaning towards something like $117.50.  Those numbers imply earnings potential in 2015 of something north of $125.  Using three different sets of numbers we get these current valuation metrics.

$117.50 is a current PE of 15.16 and an earnings yield of 6.6%.

$120.74 is a current PE of 14.76 and an earnings yield of 6.7%.

$125.00 is a current PE of 14.26 and an earnings yield of 7.0%.

These prices are not cheap the way stocks were priced over the past few years but neither are they historically expensive.  Equities also have to be viewed in the framework of interest rates that are still trading at historically low levels.  Stocks currently trade on a current earnings basis with roughly a 16 PE.  Using that metric for next year on estimated earnings then fair value for the S&P 500 is somewhere between 1,880 and 1,930.  This is just what the math says.  No assumption should be made that these prices will be met.  

The economy may grow faster in 2014 than people currently expect which would be a positive for equities.  The other side of that coin is that the potential for higher interest rates next year could be a significant headwind for the markets at some point.  I would also note that foreign markets look more reasonably priced on a valuation basis than the US.

Charts courtesy of FINVIZ.com.

*Long ETFs related to the S&P 500 in client and personal accounts.