What is the Future Path for Fair Value on the S&P 500? - Real Time Insight

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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 incorrect.   The market response to the FOMC statement suggests investors believe the Fed has credibility in terms of its intended policy actions.

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 this afternoon.   

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 1680 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… after the fiscal cliff?


 
PRO-ULT SH S&P5 (SPXU): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: SPXU , SPY

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