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This 2200 S&P 500 Value Looks OK Only on an Optimistic Forward Look
Bottoms-up strategists have valued S&P 500 earnings at $118 in 2016. Tie on a 16 forward P/E to do that “fair value” math. Hence, 1904 on the S&P 500 looked to be a decent “fair value” lower bound.
Above 2,200 on the S&P 500, early DEC shows us the latest EPS “fair value” calculation has support solely on a forward look.
Consult earnings yield “fair value” math too. The risk-free 10-year U.S. Treasuries offered a 1.80% rate on Nov. 1st. This rose to 2.4% in early DEC. Historically, a stock earnings yield is +3% higher than this 10-year U.S. Treasury rate. Meaning U.S. stocks should offer a 5.4% return.
So, turn the S&P 500 P/E ratio on its head to attain a stock index’s earnings yield. Divide $118 in projected earnings for 2016 by an S&P 500 trading at 2200. That begets a 5.36% earnings yield. After a +32% rally in 2013, and +12% returns in 2014, evidence is getting sketchy on ongoing S&P 500 index undervaluation, unless you look ahead very bullishly.
The latest 12-month EPS “Look Ahead” on the S&P 500 has $131.59. Multiply by 16. You get an S&P 500 “fair value” calculation at 2105.
The Russell 2000 May Correct
The “risk on” rally took the Russell 2000 (RUT) from 1000 in Feb to near 1350 in late NOV. The RUT trades at 1352 as I write on Dec. 7th. “Risk-on” rallies usually show small cap and international stock indexes move together.
My DEC call: Hold off a bit buying the RUT, but not international… on excess optimism. A big RUT run has taken place. The way forward is not as attractive for a few weeks/months on the RUT. A RUT pullback should happen.
Rates and Currencies Tell Independent Story on Their Own
A 1.04 euro/USD rate came into play late last year. The rate was 1.13 last fall. Euro parity may now happen, as earlier consensus projected. European share indexes have recovered weakly after Brexit.
Does a Fed Taper tantrum aka 2013 hit in 2017? That’s unlikely. We are clearly climbing the wall of worry outside the U.S. The U.S. is solidly at full employment.
Risks -- on China -- have changed complexion. NOTE: The renminbi keeps getting cheaper… on its own! The stealth gov’t renminbi -2% depreciation happened during Brexit. Now, the gov’t in China is worried about unchecked capital flight from China.
Another KEY: Enhanced Europe “QE.” Negative rates and fiscal stimulus are on in Japan. These two big macro players hold global rates down and keep stocks aloft.
The Best & Worst of Zacks
Today you are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. From 1988 through 2015 this list has averaged a stellar gain of +26% per year. Plus, you may download 220 Zacks Rank #5 "Strong Sells." Even though this list holds many stocks that seem to be solid, it has historically performed 11X worse than the market. See these critical buys and sells free >>
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Look At That Froth!
This 2200 S&P 500 Value Looks OK Only on an Optimistic Forward Look
Bottoms-up strategists have valued S&P 500 earnings at $118 in 2016. Tie on a 16 forward P/E to do that “fair value” math. Hence, 1904 on the S&P 500 looked to be a decent “fair value” lower bound.
Above 2,200 on the S&P 500, early DEC shows us the latest EPS “fair value” calculation has support solely on a forward look.
Consult earnings yield “fair value” math too. The risk-free 10-year U.S. Treasuries offered a 1.80% rate on Nov. 1st. This rose to 2.4% in early DEC. Historically, a stock earnings yield is +3% higher than this 10-year U.S. Treasury rate. Meaning U.S. stocks should offer a 5.4% return.
So, turn the S&P 500 P/E ratio on its head to attain a stock index’s earnings yield. Divide $118 in projected earnings for 2016 by an S&P 500 trading at 2200. That begets a 5.36% earnings yield. After a +32% rally in 2013, and +12% returns in 2014, evidence is getting sketchy on ongoing S&P 500 index undervaluation, unless you look ahead very bullishly.
The latest 12-month EPS “Look Ahead” on the S&P 500 has $131.59. Multiply by 16. You get an S&P 500 “fair value” calculation at 2105.
The Russell 2000 May Correct
The “risk on” rally took the Russell 2000 (RUT) from 1000 in Feb to near 1350 in late NOV. The RUT trades at 1352 as I write on Dec. 7th. “Risk-on” rallies usually show small cap and international stock indexes move together.
My DEC call: Hold off a bit buying the RUT, but not international… on excess optimism. A big RUT run has taken place. The way forward is not as attractive for a few weeks/months on the RUT. A RUT pullback should happen.
Rates and Currencies Tell Independent Story on Their Own
A 1.04 euro/USD rate came into play late last year. The rate was 1.13 last fall. Euro parity may now happen, as earlier consensus projected. European share indexes have recovered weakly after Brexit.
Does a Fed Taper tantrum aka 2013 hit in 2017? That’s unlikely. We are clearly climbing the wall of worry outside the U.S. The U.S. is solidly at full employment.
Risks -- on China -- have changed complexion. NOTE: The renminbi keeps getting cheaper… on its own! The stealth gov’t renminbi -2% depreciation happened during Brexit. Now, the gov’t in China is worried about unchecked capital flight from China.
Another KEY: Enhanced Europe “QE.” Negative rates and fiscal stimulus are on in Japan. These two big macro players hold global rates down and keep stocks aloft.
The Best & Worst of Zacks
Today you are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. From 1988 through 2015 this list has averaged a stellar gain of +26% per year. Plus, you may download 220 Zacks Rank #5 "Strong Sells." Even though this list holds many stocks that seem to be solid, it has historically performed 11X worse than the market. See these critical buys and sells free >>