Valuation {09.03.15}

The S&P 500 closed yesterday at 1,948.86  which is a decline  of 8.84% from 2,127.97 when we last reviewed these numbers back on May 19, 2015.   Below is our current analysis.  We are leaving our 2015 earnings estimates unchanged at this point.  We are using a range of $118-121 for 2015 but have modified slightly lower our mid-point range to $119.00.   We also 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 $119.00 {Year End 2015}

Current PE:                     16.38

Earnings Yield:                 6.10%

Dividend Yield:                1.96% {Estimated.} 

Current Expected Price Cone of Probability {COP}:   1,750-2,200.  While energy price and the dollar have been headwinds for earnings other economic data is supportive of evidence showing that the economy is still growing.  Given both of these and the recent price decline we have lowered   the COP 's top end of the range to 2,200.  

Rolling Four Quarter Estimate for the S&P 500, Our Estimate $124.00*:

Current PE:                     15.71

Earnings Yield:                 6.34%

*We are using our current estimate as we believe that earnings from the energy sector will be better than the market expects and the dollar is becoming less of a headwind for corporations.  The change in our view is not material to earnings analysis.  Please also note that the rolling four quarter estimate will likely increase at the end of this month as the market starts to incorporate Q4 2016 estimates into it's calculations.  Based on a preliminary analysis of that number the current PE would be around 15 and the earnings yield about 6.5%.

The current yield on the 10 year US Treasury is 2.18%  and has declined 11 basis points since the last time we did this analysis.    

The Cone of Probability {COP} 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.

Back next week with some longer thoughts about where we are and where we may be going.  Happy Labor Day.  

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