With the final S&P 500 earnings in the books, the index continues to remain elevated above a fair market value. Trading around 1130, the S&P 500 results in a 16% premium before reaching a nominal fair value – roughly 950.
The following table illustrates Fair Market Value for the S&P 500 using timeframes of 5, 10, 15, 20, and 30 year average earnings (full report available here).
Readers can see that on both a nominal and CPI-adjusted basis, these two index calculations nearly match. Included in the chart is a snapshot of the S&P as of this writing, roughly 1130 and how the valuation compares to the data back in June.
As a reminder, this quarterly earnings study uses both nominal and CPI adjusted data (popularised by Professor Robert Shiller). A primer on the study is available here. As one can determine from the table, regardless of time horizon for investors, the S&P 500 remains overvalued. When viewing the chart below for the combined Fair Market Value – readers can clearly see that the S&P 500 will ALWAYS return to a fair value (and can remain undervalued for a period of time):
Corresponding to the similarities within this last Q2 Fair Market Value, the following chart illustrates why adjusting original (nominal) data with a CPI factor may be unnecessary:
Clearly, adjusting earnings by a CPI calculation to determine “Real Earnings” may sound proper, but has little value.
Recent financial analysts stress that the S&P 500 is cheap on an Earnings Yield basis. Using the same methodology, the following table shows 10 years of average earnings divided by current index price (average of monthly closes):
Ouch, hate to use that analysis in determining entry points for the S&P 500!