S&P500 Valuation Musings

Interesting valuation comments – looks like the street is/was expecting $176 in earnings for 2020 but no doubt will be revised down. At the mkt high 3393, the forward p/e was showing around 19x depending on the day. but at today’s close of 2529 , we now show a forward p/e of 14.4x. 14x  puts the mkt back to last year in a reasonable value territory.

Now that rates have been cut to zero, this could support an even higher forward p/e. But if the mkt is assuming that 19x holds but with reduced earnings then that could imply earnings get revised to $130. This could be a 26% cut in yearly earnings estimates which may or may not be enough if the Chinese Flu burns itself out by the summer.

Is this reasonable?

If one looks at the earnings yield model, where an invest buys at 2 x 10yrUST to adjust for the risk or perhaps more if you want to be conservative. Assuming 1% for the current 10yrUST yield  – then the estimated earnings yield is 2%.

if an investor takes $130 in revised estimated earnings for 2020, divide that by the 2% – the new target for the mkt could be as high as 6500.

Fanciful thinking but food for thought