The S&P Was Overpriced by 27% in Q3, And 30% In Q4 Of 2010

Fellow retail investors – beware at buying indexes here. 

Using S&P website and Professor Robert Shiller ‘s data (which isn’t up to date, but I updated it for him) – the S&P went from 27% overpriced in September (Q3 earnings data) to an estimated 30% overpriced in Q4 (using estimates from S&P). 

The chart below shows the relationship of between Professor Shiller’s data and nominal numbers (not much difference – which is the point of the study in the first place).

turner chart

Photo: Chris Turner

The 27% overvalued metric originates from using nominal averages of 5/10/20/30 year Price to Earnings, monthly P/E, Year over Year earnings growth and average of S&P index price for the month (Sept). 

Full 15 page document is listed here.

The next chart demonstrates the 12 month trailing earnings growth from 1988 through 2012 (estimates from S&P).

The black line denotes the earnings trend. The first 12 years show that the average 12 months trailing earnings were around 30 and the second 12 years were around 54.  Quite a jump!  Knowing that profits will soon exceed the bubble of 2007 should make retail investors very wary (because in 2007, very few predicted an earnings collapse)!

turner chart

Photo: Chris Turner

Lastly – here is the Q4 overvalued metric predicated on the estimates of $74.57 for 2010 earnings. What should jump out to you is that yes, we can remain overvalued for long periods of time, but in every circumstance – we have always reached fair value again (and went below).

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