Research Articles

Why Our S&P 500-at-1254-Before-2011 Forecast Still Stands

Julie C - Tuesday, November 02, 2010

On September 5, 2010 we published an article on Seeking Alpha that suggested that the S&P 500 would reach 1245 by year end. This forecast was based on the S&P 500 trading at its 80 year historical normal PE ratio of 15 and a consensus earnings forecast for calendar year 2010 of $82.98. Below is the earnings and price correlated F.A.S.T. Graph™ dated September 1, 2010 that graphically portrayed our forecast based on the numbers. On October 29, 2010, Standard & Poor's Corp. updated the earnings estimate for the S&P 500 for calendar year 2010 to $83.62, or $.64 higher. As you can see from the chart below the S&P was at 1080.29 when the article was first published.

9/5/2010-Why the S&P 500 Should Reach 1245 by Year-End 2010 (Click to enlarge)

As you can see from the updated F.A.S.T. Graph below, the new forecast for the S&P 500 based on the updated increased earnings estimate has risen to 1254.22, or 9.52 points higher than the September forecast. Although these numbers are essentially the same, since the new forecast is only slightly higher, you can see from the graph below that the S&P 500 stock price (black line) is tracking the earnings justified valuation line (orange line) as forecast. Therefore, with only two months left the principle that earnings determine market price is thus far holding true.

S&P 500 20yr. Earnings Correlated to Price, 11/1/2010 (Click to enlarge)

Conclusions

One of the most interesting takeaways from the above graph is how the S&P 500's price earnings ratio has really not fallen below its 80 year historical fair value PE of 15. When the stock price fell precipitously it was due to a drop in earnings, not a reduction in the PE ratio. From this observation, it is reasonable to assume that the historical normal PE ratio of 15 is a pretty solid metric for investors to hang their hat on.

The big risk would be that earnings collapse rather than the PE ratio falling below 15. With the S&P 500 currently valued precisely at 15 times blended estimated earnings, it would seem that this important index is fairly priced today. It will be interesting to see how the next two months turn out and whether the earnings forecast of $83.62 holds and the 1254.22 level is reached.

Disclosure: No positions

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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“I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


“When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

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“Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


“About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


"Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


“If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


“I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


“I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


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