5.9 C
New York
Friday, March 29, 2024

S&P 500 Price Projections Based on Earnings: New Update & Slight Change

Courtesy of Doug Short.

With 95% of Q2 2014 earnings reported, let’s update the previous S&P 500 Price Projections through December 2015 using forecasted earnings previously (available here). As a reminder, simply by tracking the forecasted earnings, we can “picture” where the S&P 500 would trade out to December 2015 based on historical data.

The following data, derived from Standard & Poor’s Senior Analyst Howard Silverblatt’s Excel file, shows the correlation over several time periods between the average of monthly closes and what the “projected price” would have been using a proprietary formula. Previously, I used a quarterly method to provide a projected price, but I adapted the math to accommodate a more timely monthly projection.

For example, in the table above, the 3 year average operating earnings possessed a 0.855 correlation with the actual price of S&P 500 (1 would equal 100% correlated, -1 would equal 100% inverse correlation). By simply averaging the last 3 years (12 quarterly earnings reports), the change in the S&P 500 index over time (1989 to present) nearly matched the change in operating earnings over the same time period (0.855 correlation). The second column calculates what the S&P should have been based on the 3 year average (S&P 500 Projected Price) and correlated with the actual S&P at 0.83 (still – very highly correlated). However, moving into the 1 year average operating earnings and 1 year S&P 500 equivalent produced a supercharged 97.5 percent correlation.

And the next question that always occurs – what the heck do I do with the information? And here is the chart…

Click to View
Click for a larger image

While the indicator resembles a moving average, the S&P projected price tracks the S&P 500 average of monthly closes price relatively well. The calculation involves using an average Price to Earnings ratio for the same time period and multiplying that by the average earnings (for the mathematically oriented, insert the word “mean” into the “average” spots). To extend the projection out to December 2015, we use the average earnings growth using 1989 to present quarter over quarter change in growth.

However, one must be leery using “earnings forecast” because these are normally downwardly revised and exogenous events (such as we saw in 2008) may dramatically change earnings.

Additionally, by calculating when to be “in the market” (buy the S&P 500 Index) and when to exit (be in cash), we see that an initial investment of $10,000 would be worth nearly $89,000 (excluding S&P 500 dividends) versus simply investing in the S&P 500 and getting just under $57,000. This relatively simply strategy will not make one rich, but may help in identifying when to buy and when to sell.

Forecasted S&P Index prices generally mean nothing and choosing to predict the future remains futile (and yet we still do it – “insane” definition perhaps?). But, employing this simple concept on a monthly basis may assist in decisions on whether to be “in the market” or “out.” In the above example, one would have been “IN” the market 226 months and “OUT” 73 months since 1989. This data also provides a “target” S&P number that if crossed – warrants a sell or buy making the decisions relatively automatic. But that number stays locked in my proprietary desk!

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Stay Connected

157,449FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

0
Would love your thoughts, please comment.x
()
x