Saturday, May 05, 2007

S&P Index Fair Value Estimates

Reported earnings estimates are available at the Standard & Poor's website for the S&P 500 index for the year 2007 and 2008.

2007 reported earnings estimates
1st Quarter - $21.35
2nd Quarter - $23.40
3rd Quarter - $22.90
4th Quarter - $21.80
2007 total = $89.45

2008 reported earnings estimates
1st Quarter - $24.20
2nd Quarter - $24.00
3rd Quarter - $23.80
4th Quarter - $22.20
2008 total = $94.20

Historically, the average P/E ratio of the S&P 500 index has been around 15 based on the trailing 12 month reported earnings. On average people haven been willing to pay 15 times the trailing 12 month reported earnings for the broader stock market.

Based on this, the fair value of the S&P 500 index at the end of 2007 should be around 1342 (89.45*15 = 1341.75). We are currently running about 160 points ahead of the perceived fair value at the end of 2007 and the end of 2007 is still about 8 months ahead of us.

Also, the fair value of the S&P 500 index at the end of 2008 should be around 1413 (94.20*15 = 1413). We are currently running about 85 points ahead of the perceived fair value at the end of 2008 and the end of 2008 is still about 20 months ahead of us.

All disclaimers apply.

1 comment:

Yamaka said...

The reported earnings given for 2007 is not updated; the updated one is $78.34.

Since the 10 y T is 4.15%, one would give P/E of 19 for the SP500 Index.

78.34 x 19 = 1488 for the year end 2007.