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%.