  IS THE S&P 500 INDEX NOW A GOOD
INVESTMENT?
What Return Can You Reasonably Expect From Investing in the S&P 500 Index?
This article is your OneStop Page to Understand The S&P
500 Earnings and Dividend Yield and how these relate to The Fair Value of The
S&P 500 Index.
This short article (which draws on Warren
Buffett's teachings^{1}) provides:

Calculations of the current fair value of the S&P 500
index
based on several scenarios

The Expected next 10year average Return per Year
from the S&P 500 based on earnings growth and terminal P/E Assumptions.

The S&P 500 index P/E ratio (based on trailing and forward
earnings)

Earnings and earnings yield on the S&P 500 index (GAAP, operating and
forward earnings)

Dividend Yield on the S&P 500 index

A link to the source for
all the S&P 500 data on
the the Standard and Poors web site

The Exchange Traded Fund (ETF) symbols to use to invest
in this S&P 500 index
Mathematically, the Fair Value of the S&P 500 Index depends on: the return that investors require,
the current earnings level, the expected growth in
earnings, and the probable P/E ratio that it can be expected to be sold for at the end of a reasonable holding period of
say 10 years.
This article provides a range of values depending on the
scenario
chosen. I believe that the analysis indicates that a fair
value for the S&P 500 Index is within the range of 1587 (for required
expected return of 8%) to 1879 (for required expected return of 6%), with a midpoint estimate of
1733 (for required expected return of 7%). Our assumption for this estimate is that the S&P
earnings and dividend will grow with GDP at about 5% per year (that is 5% nominal GDP
growth such as 3% real growth and 2% inflation) and
sell at its longterm average P/E of 16 in ten years.
You can compare our fair value estimate of
1733 to the
current S&P 500 level which is
available here.
This analysis is dated September 20, 2014.
However the calculated fair value of the S&P 500 index is not affected by the
precise date of the analysis and our fair value estimate of 1534 to 1817 with a midpoint of
1733 will not change
until at least after the next set of quarterly earnings numbers becomes
available, and even then will not change much.
As of of September 20, 2014, the S&P 500
index at 2010 appeared to us to be
about 16% overvalued, as a point estimate, based on a longterm investment and
based on reasonably conservative (but not pessimistic) assumptions. However, if
it is assumed that interest rates will remain very low and investors require
only an expectation of a 6% (pretax, precosts) return from equities and that a P/E of about 18 will apply in ten years then the S&P 500 could be considered
to be about fairly
valued. But those are aggressive assumptions and I consider
the S&P 500 index to be overvalued at this time.
Nevertheless, the analysis suggests that
investing in the S&P 500 will provide a positive although small return over
the next ten years under even the more pessimistic scenarios shown.
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ANALYSIS
A quick indication of whether or not the S&P 500 index is fairly valued is
provided by simply looking at its P/E ratio. As of September 20, 2014, the S&P 500
was at 2010 and had a P/E ratio (based on actual reported earnings in the past year) of
19.5. This is noticeably higher than the historical average P/E ratio of 15.9.
However, today's record low interest rates support a P/E ratio somewhat higher than the historic
average. Still, the quick indication is that the S&P
500 index is overvalued at this time at 2010. However this might be jumping to
conclusions. We have to consider whether the recent earnings level
on the index are at a normal level and what the outlook is.
This article explores the question of the estimated fair value of the
S&P 500 index in much more detail
below.
Importantly, an analysis of the fair value of the S&P 500 index will not
likely provide a shortterm indicator of market direction but
it should provide a longterm indicator of the expected return from investing in
the S&P 500 index at this time.
The attractiveness of the S&P 500 index level can be judged by looking at the current
level of earnings and dividends of the S&P 500 index stocks, projecting the future rate of
earnings and dividend growth and by considering the minimum return required by
investors. Analysts often apply valuation techniques to
individual stocks. It is actually far easier to apply these
calculations to a stock index since an index constitutes a portfolio and
therefore eliminates much or most of the random noise of unexpected events through
diversification. Still, many challenges remain in applying this analysis and
its results while providing some indication for the longterm and offer no
insight for the shortterm. The index remains vulnerable to changes in interest rates
and to growth in the economy but is usually largely insulated from the numerous random
events that can impact an individual stock.
What is the Earnings and P/E ratio on the S&P 500 index right now?
(September 20, 2014 with the index at 2010)
Data from
Standards and Poors itself provides no less than
five quite different answers to the above question based on different views of
the earnings on the S&P 500 index.
S&P 500 Index Earnings Type 
Annual Earnings on Index 
P/E Ratio at S&P index 2010 
Earnings Yield 
Actual latest year (trailing four
quarters to June 2014) GAAP earnings 
$103.21 
19.5 
5.1% 
Latest year "operating" earnings (removes "unusual"
items) 
$111.94 
18.0 
5.6% 
Forecast forward GAAP earnings for the next year (next four
quarters) 
$123.10 
16.3 
6.1% 
Forecast forward operating earnings for the next year
(estimates summed by individual company) 
$127.75 
15.7 
6.4% 
Forecast forward operating earnings for the next year
(estimate for the group of companies) 
$126.16 
15.9 
6.2% 




For Comparison here are the S&P 500 Earnings in prior
years: 
Earnings 
Historical P/E 
Historical Earnings Yield 
2013 Actual GAAP Earnings, S&P ended at 1848 
$100.20 
18.4 
5.4% 
2012 Actual GAAP Earnings, S&P ended at 1426 
$86.51 
16.5 
6.1% 
2011 Actual GAAP Earnings, S&P ended at 1258 
$86.95 
14.5 
6.9% 
2010 Actual GAAP Earnings, S&P ended at 1258 
$77.35 
16.3 
6.1% 
2009 Actual GAAP Earnings, S&P ended at 1115 
$50.97 
21.9 
4.6% 
2008 Actual GAAP Earnings, S&P ended at 903 
$14.88 
60.7 
1.6% 
2007 Actual GAAP Earnings, S&P ended at 1468 
$66.18 
22.2 
4.5% 
2006 Actual GAAP Earnings, S&P ended at 1418 
$81.51 
17.4 
5.7% 
2005 Actual GAAP Earnings, S&P ended at 1248 
$69.93 
17.8 
5.6% 
2004 Actual GAAP Earnings, S&P ended at 1212 
$58.55 
20.7 
4.8% 
2003 Actual GAAP Earnings, S&P ended at 1112 
$48.74 
22.8 
4.4% 
2002 Actual GAAP Earnings, S&P ended at 880 
$27.59 
31.9 
3.1% 
2001 Actual GAAP Earnings, S&P ended at 1148 
$24.69 
46.1 
2.2% 
2000 Actual GAAP Earnings, S&P ended at 1320 
$50.00 
26.4 
3.8% 
1999 Actual GAAP Earnings, S&P ended at 1469 
$48.17 
30.5 
3.3% 
1998 Actual GAAP Earnings, S&P ended at 1229 
$37.71 
32.6 
3.1% 
When you ask the "simple" question of "what is the earnings on
the S&P 500?" index or "what is its P/E ratio?" you are given a number of quite different
answers. We can help you fully understand the different answers.
Standard and Poors itself in its "The Outlook" publication
focuses on the forecast year (called forward) operating earnings scenario, summed by individual
company which is usually the highest earnings
number and lowest P/E forecast. I find that to be overly aggressive as
it ignores unusual losses. (Surely on a group of 500 companies a certain amount
of socalled "unusual" losses is to be expected and should not be ignored). Also
these companybycompany forecast operating earnings are usually higher than the
forecast for the group of companies as a whole and this indicates an upward bias
in the earnings forecast.
As of September 20, 2014, the S&P 500 index was at
2010 and had a trailing Price Earnings Ratio ("P/E") of 19.5 (the
historical average is 15.9) based on actual trailing reported
earnings and had a current Dividend yield of 1.99% The trailing P/E based on
the past 12 months operating earnings (eliminates unusual onetime items) was
moderately more attractive at 18.0. The forward S&P 500 P/E ratio based on
projected reported actual accounting GAAP earnings in the next 12 months was
still more attractive at 16.3. The forward P/E based on forecast
or forward operating earnings in the next 12 months (eliminates unusual
onetime items) was moderately attractive at 15.9 (based on an overall index
forecast). And it was at 15.7 based on the summation of individual
forecast operating earnings for the 500 companies.
Most analysts might focus on forecast operating earnings
for the index as a whole (P/E of 15.9) as the best estimate since it eliminates unusual gains and losses and is
future oriented.
Given that projected earnings tend to be optimistic and to
ignore "unusual" losses, I
normally prefer to use the actual trailing P/E, or equivalently the actual
trailing GAAP earnings level. This figure is $103.21, for a P/E of 19.5.
It is important to understand that this starting earnings level is a
very major determinant in our calculation of the fair value of the S&P 500 index
and that it can be a difficult number to estimate if the actual trailing
earnings is not judged to be at a "normal" level. Currently I would judge
the trailing GAAP earnings to be representative of a normalized level.
Although the 2013 GAAP earnings were substantially higher than the earnings in
2012 they are also substantially below the 2014 projected level. And the
earnings in the first half of 2014 were moderately higher than the earnings int
he first half of 2013.
The S&P 500 index
therefore represents a portfolio of 500 stocks. For each $2010 (the index value) purchased, the underlying companies in the
portfolio are earning $103.21 and currently pay an annualized dividend of
$2010 * 0.0199 = $40.00
When we buy the S&P 500 index, we can therefore think of it as
being an investment or "stock" that (as of September 20, 2014) costs $2010 and
currently earns $103 per year and pays a current dividend of $40.00 per year. It is
worth thinking about whether or not this "stock" or
"business" is a good investment at or
around its recent level of $2010.
We know that the S&P 500 index was at
2010 on September 20, 2014. We can estimate what the S&P theoretically "should" be
trading at based on the value of its
current earnings and
dividends and the projected growth in those earnings and dividends. This
intrinsic value approach calculates the value of the projected earnings and
dividends for a ten year period and then assumes that the index is sold at some
projected future P/E ratio.
In addition to the beginning earnings and dividend level,
three additional factors are required to calculate the fair value at which the
S&P 500 should be trading at. These are, 1. The forecast average
annual
growth rate in earnings and dividends over the next ten years. 2. The forecast
P/E ratio at which the S&P index will be trading in ten years time. 3. The
estimated rate of return required by investors.
The S&P 500 portfolio average earnings should (in the longer
term) grow at a rate close to the growth rate of the U.S. economy in nominal
(after inflation) terms. I believe a prudent estimate for this nominal growth rate is
4% to 6% and I would focus on 5%. (Although a good case could also be made
for 4%.) This 4 to 6% nominal GDP could occur with real GDP growth of 2 to 3%
and inflation of 2 to 3%. We have a short
article that both explains why
(quoting Warren Buffett) and also demonstrates that earnings have tended to grow at about
the same rate as nominal GDP growth in the long run.
The following graph illustrates that S&P 500 earnings have
trended up at about the same rate as GDP growth (although slightly lower) over
the longterm, although certainly with substantial volatility around the trend in
individual years and over short periods of years.
This graph also clearly illustrates that the U.S. GDP
(In nominal dollars, not inflation adjusted dollars) has trended up
steadily and has never failed to grow over say a three year period, except in the case of the
1930's depression.
Note that we use a logarithmic scale on this chart.
Logarithmic scales should always be used, on data that grows over time, when the time period is more than about
30 years because otherwise the lines will rise up exponentially. Note that the
left and right scales are consistent in that each rises exactly 10,000 fold from
bottom to top and each point on the right GDP scale is exactly 100 times higher than
the corresponding point on the left S&P earnings scale. Many analysts improperly
present data with inconsistent scales.
The next chart presents the same data but starting in
1983
and using a regular arithmetic scale so that we can more closely examine the
graph over more recent years.
The S&P 500
earnings (the red line) plunged in 2007 and
2008 after
reaching a peak in 2006. But there has now been more than a total earnings recovery since
the bottom in 2008. There was a small decline in S&P 500 earnings in 2012 on an
as reported basis but growth recovered sharply in 2013.
The GDP figure is
showing a small dip in 2009 with a full recovery by 2010 and continued
growth through 2013. Note that the GDP figures here are in nominal dollars, whereas reports of GDP growth
usually refer to real, inflationadjusted dollars.
This chart shows that while
U.S. GDP rose fairly steadily since 1983, the S&P 500 earnings growth significantly lagged the GDP growth from
1983
bottoming with the recession in 1992. Thereafter the S&P 500 earnings rose at about
the same rate as GDP or a bit higher before plunging after 2006 and then
recovering strongly in 2009 through 2011. S&P earnings did not grow in 2012
but grew very strongly in 2013.
The trailing
GAAP earnings value of $103 noted above is somewhat above the S&P 500 earnings trend since 1992. This
$103 earnings level is well below the forecast earnings level for the next four
quarters. However based on past achieved earnings it certainly does not appear to be below
trend. The forecast earnings levels are above trend and to be
conservative we will not use those forecast earnings levels.
Having
determined and discussed the earnings level on the S&P 500 index we also need to
make an assumption about the P/E level that is likely to apply to the index in
the longer term.
The average for the S&P 500 P/E ratio since
1936 is 15.9 (this eliminates from the average any P/E greater than 50 which
only occurred in Q4 2008 through Q3 2009 when the earnings plunged to abnormally
low levels). But the
average (on the same basis) since 1988 has been 22.1. However the
Justifiable P/E changes with earnings expectations and the market's required
return on equities.
The article
states "I have conservatively calculated that the current
Justifiable P/E is about 14.3 assuming that with today's low
interest rates investors require about a 7% expected return and assuming that
competition will drive available returns down to the required 7% level." The
article also indicates that if companies can deliver in perpetuity an 8% ROE
when investors only require 7% (perhaps due to a lack of corporate competition)
then a P/E of 21.4 can be justified but we considered that to violate
equilibrium conditions. However, it does appear that
companies have been able to earn ROEs higher than the required return and to do
so consistently which does justify a higher P/E. The longrun P/E range used in our table below is
14 to 18.
I would estimate that a minimum (pretax)
expected return required
by stock investors (given today's historically low interest rates) is in the range of
6% to 8%. The higher return required by
investors then the lower the price or level that investors should be willing to
pay for the index today, all else being equal.
The following table calculates the value that the S&P
500 will be at in ten years given various forecasts for the earnings
growth and given various scenarios for the forecast P/E ratio that will apply at
that time. The second last column of the table then shows the fair or present value
that we should be willing to pay today for the cash flows that would result from
ten years of dividends plus the assumed cash from selling the index in ten years
time. The present value is calculated based on various scenarios for the
required return or discount rate.
The last column
in the table indicates the average annual return that would be made if the
S&P 500 is purchased at its recent level of 2010 and if earnings and
dividends grow at the indicated rate and the index trades at the indicated P/E
ratio in ten years time.
S&P 500 Current Annual Earnings Estimate 
S&P 500
Current
Annual
Dividends 
Earnings and Dividend Growth forecast 
S&P 500 P/E forecast in 10 years 
Resulting S&P 500 index in 10 years 
Required Return 
Resulting S&P 500 index Fair Value Today 
Resulting
Fair P/E today 
Return
per Year Buying at S&P 2010 
$
103 
$
40.00 
4.0% 
14 
2,135 
6% 
1,553 
15.1 
3.0% 
$
103 
$
40.00 
4.0% 
16 
2,439 
6% 
1,723 
16.7 
4.2% 
$
103 
$
40.00 
4.0% 
18 
2,744 
6% 
1,893 
18.4 
5.3% 
$
103 
$
40.00 
4.0% 
14 
2,135 
8% 
1,316 
12.8 
3.0% 
$
103 
$
40.00 
4.0% 
16 
2,439 
8% 
1,457 
14.1 
4.2% 
$
103 
$
40.00 
4.0% 
18 
2,744 
8% 
1,598 
15.5 
5.3% 
$
103 
$
40.00 
5.0% 
14 
2,349 
6% 
1,691 
16.4 
4.0% 
$
103 
$
40.00 
5.0% 
16 
2,684 
6% 
1,879 
18.2 
5.2% 
$
103 
$
40.00 
5.0% 
18 
3,020 
6% 
2,066 
20.1 
6.3% 
$
103 
$
40.00 
5.0% 
14 
2,349 
8% 
1,432 
13.9 
4.0% 
$
103 
$
40.00 
5.0% 
16 
2,684 
8% 
1,587 
15.4 
5.2% 
$
103 
$
40.00 
5.0% 
18 
3,020 
8% 
1,743 
16.9 
6.3% 
$
103 
$
40.00 
6.0% 
14 
2,582 
6% 
1,842 
17.9 
5.0% 
$
103 
$
40.00 
6.0% 
16 
2,951 
6% 
2,048 
19.9 
6.2% 
$
103 
$
40.00 
6.0% 
18 
3,320 
6% 
2,254 
21.9 
7.3% 
$
103 
$
40.00 
6.0% 
14 
2,582 
8% 
1,558 
15.1 
5.0% 
$
103 
$
40.00 
6.0% 
16 
2,951 
8% 
1,728 
16.8 
6.2% 
$
103 
$
40.00 
6.0% 
18 
3,320 
8% 
1,899 
18.4 
7.3% 
Conclusions
Given the current
earnings level of $103 and the current dividend of $40.00, by changing the expected earnings growth rate, the return
required by investors and the assumed P/E ratio that will apply in ten years I can calculate
that today's S&P 500 index should be anywhere from 1316 (assumes that our starting earnings level of
$103 is reflective of a normal starting point,
that the market P/E falls
to 14, earnings grow at only 4% annually and equity investors require an expectation of making
8%) to 2,254 (assumes our starting normalized earnings level of $100 is a
normalized earnings level, a terminal market P/E of 18 will apply in ten years, earnings grow at
5% per year and
investors only require an expectation of earning 6% on equities).
My own fairvalue
point estimate is 1733 based on the average of
the two highlighted rows This assumes that equity investors require a
minimum 7% expected return, that the S&P earnings and dividend will grow at
5%
(3% GDP growth plus 2.0% inflation) and that the long run S&P 500 P/E ratio is
its historical average of 16.
Higher S&P 500 index values are implicitly assuming that the current
normalized starting earnings level is higher than $103, that earnings growth
will exceed 5% annually, that the justifiable longrun P/E exceeds 16, and/or
that investors require less than a 7% (pretax) return.
Our range of investor required
expected returns of 6% to 8%, although low by historic standards, is very attractive
compared to the recent 10year U.S. government bond yield of
about 2.6%. It's also attractive compared to longterm A rated corporate bond yields
which we understand are about 4.0%.
The last column
in the table shows that under the indicated assumptions, if money is invested
today in the S&P 500 and held for ten years and if the earnings and
dividends grow at the rate indicated and the P/E ratio in ten years is as
indicated then the average returns per year would range from 3.0% to 7.3% per
year. With the 10year treasury bond currently yielding about 2.7% some of these
estimated returns are attractive. Of course the earnings growth on the S&P
500 could be lower than an average 4% per year and the terminal P/E ratio could be lower than 14, in
which cases a lower return would result. One can always come up with losing
scenarios, but based on historical earnings growth and P/E ratios it would
appear that over this next ten year holding period, stocks are likely to significantly outperform
government bonds but are also not going to provide highly attractive returns.
The
overall conclusion is that a fair value of the S&P 500 index based on
estimated normalized annual earnings
is probably within the range of 1587 to 1879, with a midpoint
estimate of 1733. Since this is based on many estimated numbers it should
be taken as a rough indication and certainly not as an exact determination.
My estimate in
the two highlighted rows is that the S&P 500 in ten years (the year 2024)
will be at about 2684 (assumes 5% annual earnings growth from $103 and a P/E ratio
of 16). Buying the S&P
500 index when it is at about 2010 (the level when this article was written) should be expected (but certainly not guaranteed) to
result in a forecast return of about 5.2% per year if held for the next
10 years. This is based on about 2.9% per year capital gains to get to 2684 plus 2.0% for dividends. The expected standard deviation around this expected
5.2% is also
large so that the actual return over the next 10 years might be expected to fall
within a range of about 3% to 7% per year with some chance of being outside that
range. And that return includes dividends and is before trading costs and
taxes. And in any given year, the return will range wildly and should definitely
be
expected to be negative in some years.
It is impossible to predict where the S&P 500 index will
go
in the next year. But it is possible to estimate its fair value and therefore whether or not it is
currently overvalued based on reasonable growth expectations and a reasonable
expectation around the initial earnings (or equivalently the initial P/E
level) and around the terminal P/E ratio. Caution is warranted because the S&P 500 can
sometimes spend years in an overvalued or an undervaluedstate. But
ultimately, as we have seen in the early 2000's crash, and the crash of 2008 and
early 2009, valuation does correct itself. (And sometimes overcorrects to the downside).
You can easily
invest in the S&P 500 index by buying the ishares S&P 500 index Exchange
Traded Fund under symbol IVV on
the New York Stock Exchange. And if you are really bullish you can buy the
double bull Proshares Ultra S&P 500 symbol SSO.
Or if you are bearish there is the single bear ETF, Proshares short S&P 500
symbol SH, or the double bear
Proshares Ultrashort S&P 500 symbol SDS.
Be cautious and understand what you are buying.
Readers should see also a similar article on the
Dow Jones
Industrial Average and as well a similar analysis of the
Toronto Stock Exchange index.
Shawn C. Allen, CFA, CMA, MBA, P.Eng.
President, InvestorsFriend Inc.
www.investorsfriend.com
Updated September 20, 2014
Past Results from this Analysis.
Before placing any weight on the analysis above, you may be interested to
review a summary of the fair values that we calculated in the past and whether
or not our longterm analysis provided any hint of the market crash (Arguably
the June
1, 2008 analysis provided some hint, especially for investors that felt that
a 9% return was required for which we indicated a fair value of the S&P 500
index was 982 in that case and the index was sitting at 1400).
Keep in mind that with the past analysis we also provided a range of
valuations and readers were free to select a different fair valuation from our
table above.
The table below shows that our
analysis appears to have been directionally correct. Based on where the S&P
500 index is today we were correct that it was overvalued from 2004 through to
October 2008. (There was one exception, we were wrong to see the market as fairly
valued in February 2008). Our analysis correctly saw the market as undervalued
in the Spring and Summer of 2009.
The ONLY time our analysis saw
the S&P 500 as undervalued in the past eight years was near its major low
in the Spring of 2009. And indeed, based on today's S&P 500 level that was a
time where an investor buying the S&P 500 has made an
abnormally high return.
In general, based on where the
S&P 500 is today, this past analysis looks like it has been too cautious. It
usually found the market to be overvalued when in fact investing at the dates
indicated until today has provided a decent return in almost all cases. Investing and
holding at the dates shown from 2004 through 2008 has, as of now,
provided acceptable but unspectacular returns. Investing and holding at any of
the times shown since 2009 has, as of now, provided exceptionally good
returns.
Date
of prior calculations 
S&P
Level at that Date 
Fair
Value we Calculated 
Market
appears: 
Average
Capital Gain Per Year (annualized) 
Apparent
Performance as of April 5, '14 with the Index at 2010 (and note that this
was meant to be a longterm tool not shortterm) 
18May13 
1667 
1396 
overvalued 
13.6% 
In
the very early going, it appears we were too conservative 
24Feb13 
1557 
1396 
overvalued 
17.7% 
In
the very early going, it appears we were too conservative 
8Sep12 
1438 
1387 
about
fairvalued 
18.0% 
In
the very early going, it appears we were too conservative 
25Feb12 
1366 
1340 
about
fairvalued 
15.9% 
In
the very early going, it appears we were too conservative 
25Aug11 
1159 
1188 
about
fairvalued 
20.0% 
In
the still early going, it appears we were too conservative 
26Feb11 
1320 
1165 
overvalued 
11.8% 
In
the still early going, it appears we were too pessimistic 
15May10 
1136 
944 
overvalued 
13.6% 
In
the still early going, it appears we were wrong that the market was
overvalued. 
5Aug09 
1003 
886 
overvalued 
14.2% 
It appears
we were wrong. 
20Feb09 
770 
896 
undervalued 
18.8% 
It
appears we were correct, the index was very much undervalued on Feb 20,
2009 
5Oct08 
1099 
991 
overvalued 
10.1% 
It appears
we were wrong the market has delivered a good return to buyers in October
2008 
1Jun08 
1400 
1158 
overvalued 
5.0% 
It appears
we were directionally correct. 
25Mar08 
1358 
1221 
overvalued 
5.4% 
It appears
we were directionally correct. 
10Feb08 
1331 
1388 
about
fairvalued 
5.6% 
It
appears we were correct 
19Aug07 
1446 
1373 
overvalued 
3.9% 
It
appears we were directionally correct that the index was over valued 
10Feb07 
1438 
1295 
overvalued 
3.7% 
It
appears we were directionally correct that the index was over valued 
9Sep06 
1299 
1189 
overvalued 
4.9% 
It
appears we were directionally correct that the index was over valued 
7Apr06 
1295 
1215 
overvalued 
4.7% 
It appears
we were directionally correct. 
28Feb05 
1191 
925 
overvalued 
5.0% 
It appears
we were directionally correct. 
4Sep04 
1104 
961 
overvalued 
5.6% 
It appears
we were directionally correct. 
This analysis attempts to look forward ten years. That's always difficult to
do and subject to much error. A full ten years have passed since our September
2004 analysis. At that time we were projecting that the S&P 500 index in
September 2014 would be at 1537 based on a P/E of 16 and that its earnings would
grow 5% per year from $59 to $96 and that the dividend would grow from $20 to
$33. The projection was intended to be reasonably conservative. The index is 31%
higher than our projection. The earnings are 7% higher which turned out be
reasonably close while the dividend is running about 21% higher than predicted. The
P/E ratio at 19.5 is 22% higher than our base projection of 16 and higher than the top end of our
projection which was a P/E of 18. If the P/E was at the longterm average if
about 16 then our projection would have been quite close.
1. See Warren Buffett in Fortune Magazine,
November 22, 1999, and
his updated article of December 10, 2001.
