S&P 500 to 1500?

Here’s a look at the S&P 500 along with its earnings.

The black line is the index and it follows the left scale. The yellow line is its trailing four-quarter operating earnings and it follows the right scale. I’ve arranged it so the two lines are scaled at a ratio of 16-to-1. This means that whenever the lines cross, the market’s P/E Ratio is exactly 16.

Why 16?

There’s nothing special about 16 except that historically that’s been about the average ratio.

Let me say a few things about the P/E Ratio. It’s far from a perfect measure of the market, but it’s still a very good measure. You also want to look at other measures like dividend, cash and interest rates, but for this post, I want to concentrate on earnings.

Earnings have rebounded quite sharply and stock prices have kept up. From here, however, the earnings growth is projected to tail off. Earnings will still grow, but not at the rate we saw before.

(Note that I prefer to look at operating earnings instead of as-reported earnings. I think this is a better metric for looking at the broad market.)

According to the latest forecasts, the S&P 500 is projected to earn $94.27 next year. At a ratio of 16-to-1, that translates to an S&P 500 of 1508. The index would have to rise by 23% over the next 14 months to get there, which is very reasonable.

But even if the market’s P/E Ratio drops to 14 by the end of next year, the S&P 500 would still have to rally close to 8% to get there. And that’s a very conservative estimate.

The only danger is a Double Dip which looks increasingly unlikely. In fact, the Double Dip hysteria of this summer made the Y2K frenzy of 1999 look like reasoned discourse.

Posted by on November 8th, 2010 at 11:35 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.