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Strategies & Market Trends : Asia Forum
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To: Zeev Hed who wrote (5875)8/25/1998 9:52:00 PM
From: Joseph G.  Read Replies (2) of 9980
 
In the '60s there was a valuation formula that B. Graham gives (though he stresses he does not endorse it):
P/E = 8.5 + 2*G,
where E is seven year average historic earnings including all charges,
and G is projected sustainable earnings growth rate (for the next five years, e.g).

If I apply this formula to the SPX, it is clear that the expected sustainable growth rate recently was thought to be some 10 to 15% per year. However, if we apply the more current "real time" values of 3.5%, "fair value" P/E drops dramatically to about 15 (on past seven year average earnings), or about 12 on trailing 12 month earnings. That's a shave of 50 to 60% from market price.

Should SPX earnings start to decline ... I leave this to your imagination.
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