Friday, January 07, 2005

S & P 500 Earnings Analysis for 10/01/2003 – 09/30/2004

The Standard & Poor’s website maintains “S & P Earnings and Estimate Report” for the S& P 500 fund on its website. This data is published on a excel spreadsheet, and is available freely to everyone.

Let’s take a look at the numbers for the rolling one-year from 10/1/2003 to 9/30/2004. Each quarterly dataset has following four numbers: operating earnings, as reported earnings, core pre-pension earnings, and core earnings.

Quarter

Operating

Reported

Core Pre-Pension

Core

10/01/2003 - 12/31/2003

$14.88

$13.16

$12.93

$12.93

01/01/2004 – 03/31/2004

$15.87

$15.18

$14.02

$13.75

04/01/2004 – 06/30/2004

$16.98

$15.25

$14.51

$14.03

07/01/2004 – 09/30/2004

$16.88

$14.18

$14.18

$13.66

Totals for the year

$64.61

$57.77

$55.64

$54.37


At 9/30/2004 the S & P 500 index stood at 1114.58. Using this number let’s calculate the P/E ratio with each of the total earnings above.

Earnings

Operating

As Reported

Core Pre-Pension

Core

P/E ratio

17.25

19.29

20.03

20.50


The core pre-pension P/E is lower than Core P/E. This indicates that due to the higher stock market returns in this time period, the corporations had a net income from their pension plan investments.

Now, Let’s consider the flip of the P/E ratio. This is E/P ratio. This comes out to be about 5%. This means that if anyone invests $100 in S & P index fund, the total underlying return is 5%. The 10-year Treasury bond yield was around 4% in above-mentioned time-period. The stocks are cheaper by as much 20% by this valuation measure.

Historically, the stock market P/E has averaged about 15 with trailing 12-month earnings. On 9/30/2004, the stock market P/E stood at 20. By this historical measure the stocks are fairly valued at 54.37 * 15 = 815.55, which is about 25% below from the close of 1114.58 at 9/30/2004. According to this formula, the stocks are overvalued by as much as 25%.

1 comment:

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