S&P 500 earnings, 01 core stats, P/E & FA, "Info Tech 100"...
spglobal.com
"2001 S&P Core Earnings"
bwnt.businessweek.com
"Searching for Value in the U.S. Stock Market" -- P/E & FA:
frbsf.org
"The Info Tech 100"
businessweek.com
=================================
Selected highlights.
>>>FRBSF Economic Letter
2002-16; May 24, 2002
Searching for Value in the U.S. Stock Market
Predicting the future
Making predictions about the stock market can be a humbling experience. Still, it may be worthwhile to consider the model's predictions for the year-end 2002 level of the S&P 500 index. Given a current 20-year government bond yield of about 5.5% and employing the end-of-sample volatility measures for stocks and bonds, the model predicts a P/E ratio of 24.1. Applying this multiple to the S&P's estimate of $36.34 for reported earnings in 2002 yields a predicted value of 876 for the index--about 20% below the current level. Different predictions would be obtained if any of the model inputs (for example, the bond yield or the earnings forecast) were to change significantly over the coming year. Also note that the market has deviated from the model's predictions for sustained periods in the past.
Conclusion
Over the long history of the stock market, high P/E ratios have been transitory phenomena. Campbell and Shiller (2001) show that, sooner or later, the P/E ratio has tended to adjust back towards its long-run average. These adjustments have taken place mainly through changes in stock prices (P) rather than through changes in earnings (E). While Campbell and Shiller do not expect a complete return of the P/E ratio to its long-run average, they predict poor returns from stocks in the coming years. The valuation model described here says something similar: we would not expect the P/E ratio to return to its long-run average because the bond yield and the volatility measures are now different from the past. Nevertheless, given the current earnings forecast, the model predicts a downward adjustment in stock prices.
Finally, investors should recognize that the extraordinary returns on stocks recorded over the last 20 years have been driven in large measure by a rising P/E ratio. A believer in efficient markets would not expect the P/E ratio to continue its upward trend because the current market price supposedly already reflects investor risk perceptions and expectations about the future trajectory of earnings. Absent further changes in the P/E ratio, stock prices can rise only as fast as earnings. Since 1926, earnings have grown by an average compound rate of 5.8%. If we add to this figure the current dividend yield on stocks of about 1.2%, we obtain a forecasted total return on stocks of 7% per year--only about one-half the average compound return since 1982.
Kevin J. Lansing
Senior Economist<<< |
