Fundamentals
S&P 500 FUNDAMENTALS
The real P/E for the S&P 500 is based on “as reported” or GAAP earnings (calculated using Generally Accepted Accounting Principals), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued).
Standard & Poors has introduced a version called “core” earnings, which is more critical than GAAP and will probably become the standard in the future.
Market cheerleaders invariably use “pro forma” or “operating earnings,” which exclude some expenses and are deceptively optimistic. They are useless and should be ignored.
The following are the most recently reported and projected twelve-month trailing (TMT) earnings and price/earnings ratios (P/Es) according to Standard and Poors.
Est Est Est
2007 Q4 2008 Q1 2008 Q2 2008 Q3
TMT P/E Ratio (GAAP)…….: 18.9 20.7 21.7 20.1
TMT P/E Ratio (Core)…….: 17.7 N/A N/A N/A
TMT P/E Ratio (Operating)..: 15.2 16.3 16.8 16.1
TMT Earnings (GAAP)……..: 66.18 60.39 57.66 62.34
TMT Earnings (Core)……..: 70.80 N/A N/A N/A
TMT Earnings (Operating)…: 82.54 76.77 74.55 77.67
Based upon the latest GAAP earnings the following would be the approximate S&P 500 values at the cardinal points of the normal historical value range. They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20:
Undervalued (SPX if P/E = 10): 662
Fair Value (SPX if P/E = 15): 993
Overvalued (SPX if P/E = 20): 1324
DIVIDEND VALUE RANGE ANALYSIS
The yield for the DJIA, DJTA and the S&P 500 has historically moved between a range of 3% (overvalued) and 6% (undervalued). The normal yield range for the DJUA is between 3% and 12%. Decision Point expresses this
range as an RVR (Relative to Value Range) value of between 0 (undervalued) and 100 (overvalued). Values can fall outside that range, and, when they do, indicate even greater extremes of market valuation.
S&P 500 DJIA DJTA *DJUA
———————————– ——- —– —– —–
Current Closing Price………….: 1252 11232 511 60
Current Yield…………………: 2.3% 2.9% 1.5% 3.2%
Current P/E…………………..: 19 79 22 16
Current Payout Ratio…………..: 0.4 34.1 0.3 0.5
Current RVR…………………..: 125 102 150 98
Price at 1.5% Yield…………..: 1920 21715 511 128
Price at 3.0% Yield (RVR 100)….: 960 10858 256 64
Price at 4.0% Yield…………..: 720 8143 192 48
Price at 5.0% Yield…………..: 576 6515 153 38
Price at 6.0% Yield (RVR 0)…..: 480 5429 128 32
Price at 8.0% Yield…………..: 360 4072 96 24
Price at 12.0% Yield (RVR 0 - DJUA)…………………….: 16