S&P 500 Earnings Estimates

The Standard and Poor’s publishes the quarterly earnings estimate for S&P 500 index in an excel workbook. Currently, we have earnings estimates for the remaining quarters of 2005 and the entire year of 2006. These estimates are listed below.

Quarter Ending	Operating Earnings Estimate	As Reported Earnings Estimate
12/31/2006	$21.91	$16.70
09/30/2006	$21.08	$18.10
06/30/2006	$20.44	$18.90
03/31/2006	$19.53	$18.80
12/31/2005	$19.91	$15.00
09/30/2005	$18.90	$16.80
06/30/2005	$18.26	$16.80
03/31/2005	$17.95	$16.92

As we see from the table above, the operating earnings for the calendar year 2005 are estimated at $75.02. The estimates for 2006 are $82.96 on the operating earnings basis.

Reported earnings estimates come below the operating numbers and they are $65.52 and $72.50 for the calendar year 2005 and 2006 respectively.

We also notice that current estimates put 2006 earnings numbers about 10% higher than 2005 earnings. These “estimates” do not anticipate any slowdown in the economy.

So, what is the fair-value of S&P 500 index? Assuming a multiple of 17 (a notch below today’s levels of 18) times operating earnings, we should have S&P 500 index at $75.02 * 17 = 1275.34 at the end of 2005. Assuming multiple of 16 (another notch below the estimated 17 at the end of 2005) times the operating earnings for 2006, we should have S&P 500 index at $82.96 * 16 = 1327.36 at the end of 2006.

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