Back to top

Real Time Insight


As a big picture stock strategist, I grapple with one question more than any other. How do I determine what method works best to come up with a current fair value on the S&P 500?  This is always the biggest question on investor's minds. 
 
In your eyes, is this stock market fairly valued?
 
We have enjoyed a huge run-up in share prices the last few years.  Is this party over because the value of stocks got too high?  That is the wall of worry the market has been climbing the last few weeks. If the S&P 500 index comes to a point where investors say PRICES ARE TOO HIGH, stocks stall.
 
My sense of what accurately reflects ‘fair value’ is guided by the following four “back-of-the-envelope” methods to determine that ‘fair value’.  
 
Read on to understand where I am coming from…
 
Recall that the Global High in Q3-2007 was 1565 for the S&P 500.
 
(1) Size Stock Price Fundamentals to the Nominal Growth of the U.S. Economy
 
Current Dollar U.S. GDP in Q3-2007               14.57 $US Trillion
Current Dollar U.S. GDP in Q3-2013               16.85 $US Trillion
 
+15.7% Change in Current Dollar GDP over the last six years.
 
§  1810 is fair value for the S&P 500 right now.

(2) Use a Proxy: Two Percent Real GDP Change Over Six Years.
 

2007 1565
2008 1596
2009 1628
2010 1661
2011 1694
2012 1728
2013 1762
 
§  1762 is fair value for the S&P 500 right now.
 

(3) Look Forward on 2014 Bottoms-Up S&P 500 Earnings.
 
Apply a 15 Forward Price/Earnings ratio to:
 
$121.9 dollars per share for S&P 500
 
§  1828 is fair value for the S&P 500 right now.

 
(4) Look Forward on 2014 Top-Down S&P 500 Earnings.
 
Apply a 15 Forward Price/Earnings Ratio to:
 
$118.2 dollars per share for S&P 500
 
§  1773 is fair value for the S&P 500 right now.

 
My Real Time Insight (RTI) questions:
 
(1) What method (shown above) works best for determining fair value on the S&P 500 stock index?
 
(2) In light of your answer, is this stock market fairly valued?
 

Just Released: 5 Stocks to Double

Today, you are invited to download a free Special Report from Zacks Investment Research. It reveals five moves that could gain +100% and more in the next 12 months:

One is a "boring" business delivering blistering growth. Another is a red-hot oil and gas producer set to surge on a drilling breakthrough. Still another, an online payment provider, ignited a 53% sales explosion during the past year.

Close This Panel X

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
RPC INC RES 24.91 +8.35%
LITHIA MOTO… LAD 94.59 +4.60%
DELTA AIR L… DAL 39.15 +3.90%
FLAMEL TECH… FLML 14.51 +3.50%
SOUTHWEST A… LUV 28.87 +2.92%