Valuation {1.21.15}

It's been a while since we last looked at the valuation of the S&P 500.  The index closed at 2,019.42 on Friday.  Thats a bit better than a 6% return from the last time we took a look at this on 10.21.15.  Back then of course the S&P was just starting a climb out of a rather short and sudden 8% decline that it had seen from mid-September.   Below is our current analysis.  Please note that the forward PE for the index is now based on year end 2015 results.  Earnings have declined for the index overall but what needs to be noted that most of this decline is in the energy sector and reflects the huge decline in the price of oil.  From now on I am gong to use a simple color code to give you some reference for these numbers.  Green will indicate that the valuation on the index on a strictly historical basis has become more attractive from the last time we did this review.  Red will indicate the opposite. 

Our Midpoint S&P 500 Earnings Estimate of $125.50 {Through 12.31.2014}

Current PE:                     16.48

Earnings Yield:                 6.08%

Dividend Yield:               1.87% {Estimated.} 

Rolling Four Quarter Estimate  $125.50 {End of 2015 Via Fundamentalis.com}

Current PE:                   16.21

Earnings Yield:               6.17%

Dividend Yield:              1.87% {Estimated}

Current Expected Price Cone of Probability,   01.20.14:   1,750-2,250.

The current yield on the 10 year US Treasury is 1.83% and has declined 36 basis points since the last time we did this analysis.    

We are still in the process of developing our probable trading range for stocks this year.  The preliminary range on the Cone of Probability is 1,750-2,400.  That range is likely to be changed in the next few weeks.  The Cone of Probability is our current assessment of the trading range within which we think stocks have the potential to trade during the described time period.  It is a probabilistic assessment based on a many factors.  Some of these inputs are: Earnings estimates, also are those estimates rising or falling, dividend yield, earnings yield and the current yield on the US 10 year treasury.  This is not an exhaustive list of all of the variables that are used in creating the cone.  The Cone of Probability is used solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded outside of the range of the cone.  The data supplied when we discuss the cone is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time.