Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Stock Market S&P 500 Valuation With Normalized Earnings

Stock-Markets / Stock Market Valuations Jun 15, 2009 - 07:58 AM GMT

By: Richard_Shaw

Stock-Markets

Best Financial Markets Analysis ArticleThere are many institutional S&P 500 forecasts in the media for 2009, generally ranging from 850 to 1100 with some outliers on each side, but seldom is the underlying detail provided.  One of the more common methods of estimation involves normalization of earnings times a reasonable multiple based on history.


This article will attempt to back into some of the leading institutional projections using normalized earnings and historically experienced multiples.

Key Historical Index Price Levels:

The S&P stands now at 946.  It had a low of 741 last November and 666 in March. The high in 2007 was approximately 1575.  The low in 2002-2003 was approximately 770.

Institutional Estimates:

We cataloged a number of institutional forecasts in a recent article.  The forecasts here come from that article plus a few newer ones.  Estimate publication dates range from early May through now (issued within approximately a month).

Goldman this week stated an expectation of 950 to 1050 for 2009

Marc Faber predicts a possible run up to 1000 to 1050 by July with a near-term retracement that will not go below 800.

Meryl Witmer thinks the market is just about right now.  Archie McAllaster thinks the market is cheap at its current level.

Alan Abelson, editor of Barron’s, thinks the valuation is too high, and like Fred Hickey believes a selloff is in the offing, because the fundamentals don’t support the price level.

Deutche Bank predicts 1060 by year-end, while JP Morgan Chase is close to that predicting 1100 for 2009.

Morgan Stanley sees not much value above 825 to 850.

Barclay’s (older estimate from April 17) predicted 757 for 2009 year-end.

HSBC forecasts 900 for year-end 2009

We recollect reading some noted analyst predicting 1200 to 1250, but can’t remember who.  Let’s toss it is just to keep the range fairly wide.

Normalized Earnings.

Here is a table that presents S&P 500 “as reported” earnings (including 2009 projected “as reported” earnings from Standard and Poor’s) for 50 years (from 1960 through 2009), along with the year-end S&P 500 index price (current price shown for 2009).

The earnings are normalized (averaged without inflation factor) for 4 years, 7 years and 10 years.  The rationale for the periods is: 4 years as a presidential cycle, 10 years as a very long time, and 7 years as in between.

We end up with normalized earnings of $60 to $66 (2009 alone at about $29).

Note that the current Goldman Sachs estimate for 2009 is $63 — right in the middle of our normalized earnings (but we don’t know if Goldman was speaking of “as reported” or operating earnings).

Historical P/E Ranges:

Based on the numbers in the table, we see an average P/E over the 50 years from 17.4 to 20.6 times “as reported” earnings for 4 to 10 year normalization, with a minimum ranging from 8.7 to 11.0, and a maximum ranging from 32.5 to 43.2.

We take the position that we are past the worst of the crisis for a while at least, and that we are far from being in a normal (average) situation.  Therefore, it might be reasonable and justifiable to assign a multiple to the normalized earnings somewhere between the minimum and average values.

Without trying to split hairs over whether we are closer to bad or closer to average, if we simply use the mid-point between average and minimum multiples, we get roughly 13 for the four-year normalization, 14.5 for the seven-year normalization and 16 for the ten-year normalization.

S&P Price Forecast With Normalization and Historical P/E:

The mechanical process we have just gone through yields predicted values of approximately 860 to 960 for the S&P as a “fair value” now.  That is plus 1.5% to minus 9.1%.

A straight average valuation, which we feel is unjustified, would render fair value of 1150 to 1250.

Normalization would tend to suggest that there is more downward logic than upward logic.  Current sentiment and government spin on the economy, plus nervous cash on the sidelines, may suggest more upside than downside.

In any event, we see 775 to 1060 as the most likely range within which the S&P 500 will move in the near future, barring any new shocks to the system. That range is the 860-960 plus 10% overshoot on the high side and minus 10% overshoot on the low side. This widened range represents the current market plus 12.1% and minus 18.1%.

Proxy SPY, with a 1/10th of index corresponding price range, would come out at about 78 to 106. The current price is $95.  It would have the same +1.5% to -9.1% (or +12.1% to -18.1%) price range forecast for the year as the index it tracks.

Charting the Results:

This chart of the S&P 500 shows a plot of the index with two bold black horizontal lines bounding the 860 to 960 “forecast”, and two thin black horizontal lines bounding a 10% error factor in each direction.

The result of this mechanical approach produces a spread of forecasts that approximates the spread of forecasts of the several institutional analysts.

We’re not sure whether or not that is comforting about their work, but that’s how the numbers look, and is probably similar to at least one of the methods used in developing the forecasts that are reported to us in the media.

Because the markets are irrational short-term and rational long-term, wide variance from these estimates is entirely possible.  Because so much is up in the air about US government intervention in the market process, the rules could be rewritten overnight which put all forecasts into a cocked hat.

As an investor, you’ve got to try to read and lead the market, and chose when to play and when to stay; but you also have to protect and conserve assets when your play is wrong.  We think protective stops on risk positions make sense in this uncertain financial environment.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2009 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules