Q4 2010 S&P 500 Earnings Show Fair Market Value = 868 (30% Overvalued)

Based upon earnings from S&P and historical price to earnings ratios – as of the fourth quarter 2010, the S&P 500 shows an overvaluation of 30%. 

With the average monthly S&P of 1241 for December, a 30% correction would be approximately 868. 

The data will remain an estimate until all earnings are in for 4th Quarter 10.  However, the numbers may only change slightly (as we are 99% there).

chart

Photo: Chris Turner

Followers of Professor Robert Shiller’s cyclically adjusted Price to Earnings ratio (CAPE) need to be cautious as his data has not been updated for 6 months (Sep 10).  Many analysts that have used Shiller ‘s data within the last 6 months have been using old data and quoting an erroneous number for overvaluation.  His infamous chart shown below displays a CAPE of 23.69 vs a long term average of 16.38. 

Shiller Chart

From the chart above, the true number is 22.34.  Shiller has not updated his data but continues to average without the increase in earnings.  I took the liberty to finish his work and make accurate calculations for the 15 page report located here.

The report contains multiple timeframes for your personal preference to compare valuations over shorter or longer periods.  The last chart shows the combined fair market value from 1950 to present which provides a better representation of fair value.

CFMV

Keep in mind that markets can remain overvalued or undervalued for long periods of time.  Recently, John Hussman spent time researching valuations and the relationship of  investing during periods of over- valuation (using Shiller’s method).   Sadly, Hussman errantly quotes Shiller’s 24, but the point is still valid (just not 100% accurate). See here for his weekly market commentary.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.