I read this lead-in quote from a respected sell-side firm on
Monday. I have been thinking about the equity implications of
it all week.
"Our forecast that S&P 500 valuation would remain flat
during 2012 given stagnating economic and EPS growth is proving
The market response to the FOMC statement suggests investors
believe the Fed has credibility in terms of its intended policy
What happens if we assign similar credibility to the Fed's
economic projections and use them in our earnings and valuation
models? S&P 500 EPS would equal $112 (2013), $120
(2014), and $128 (2015). Our macroeconomic regression model
based on output gap and inflation points to an expanding P/E
multiple of 12.9x, 14.0x, and 15.1x, respectively.
But downside risk exists from the 'fiscal cliff'."
In light of this quote, I pose a fresh riddle for all of you
If the Fed's economic model is throwing up proper fair value
metrics; and the S&P 500 trades 6-12-18 months ahead; then
current S&P 500 fair value bases on 2013 numbers above. This is
$112*12.9=1445. With the S&P 500 trading 1450, we are on
fair value right now.
By next spring, the S&P 500 trades on 2014 numbers.
This is $120*14.0=1680.
That's right. Fair value under the Fed's economic
projections by spring 2013 is
for the S&P 500. After January's 'fiscal cliff', we have
multiple winter and spring worries to debate about.
What are your thoughts? Is S&P 500 at 1680 by spring
where we are going? If not, what might stand in our way…
the fiscal cliff?
PRO-ULT SH S&P5 (SPXU): ETF Research
SPDR-SP 500 TR (SPY): ETF Research Reports
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