It's been half a year since I reviewed analyst forecasts for S&P 500 earnings (SP500) and the price/earnings ratio we could derive from these estimates. Recently a fan asked me if I would update itabout what the valuation of the S&P 500 looks like now. That's what we'll do in this article.
But first, let's review the valuations we made in October, when the S&P 500 was approaching its most recent low. Since our P/E estimates are always dependent on earnings forecasts provided by analysts, it would be good to see how accurate October 2022 analyst forecasts for 2022 S&P 500 earnings turn out to be.
Three P/E estimates for October 2022 showed the S&P 500 at a level that has historically made it a good buy
In minearticle published on October 4, 2022, when the market was nearing its lows, I pointed out that there are many different collections of analyst consensus estimates and that the P/E ratios that each earnings estimate would produce differ significantly.
Back on October 3, 2022, Fastgraphs presented the P/E ratio for SPDR S&P 500 ETF Trust (NYSEARCA:SPY) from 4:70 p.m. Fastgraphs creates its SPY earnings estimate using analyst estimates for each SPY individual holding, as reported by S&P Global.
Yardeni Research Inc.uses a different set of analyst earnings estimates, I/B/E/S data reportedRefinitiv. In October, that data gave the S&P 500 a P/E ratio of 16.88. That's very close to Fastgraph's estimate at the time. These estimates were based on a forecast of S&P 500 earnings for 2022 of approximately $224 per share.
Yardeni Research also provides its own estimate for October 2022 S&P 500 earnings, which was lower than that of the data providers just discussed. Yardeni Research's estimate was that earnings for the year would reach $215 per share. Based on this estimate, last October, the S&P 500 P/E would have been 17.56.
All of these estimated P/E ratios were within the range where the S&P 500 has historically been a safe buy. However, in that October article I questioned how accurate the earnings estimates would be.
How do S&P 500 earnings for the year/end of 2022 compare to analyst estimates for October?
Actual S&P 500 earnings for 2022 were $218.09 per share. That was just 1.4% higher than Yardeni Research's estimate.
Analyst consensus estimates taken from S&P Global and I/B/E/S data were about 2.5% higher than actual reported earnings.
This should improve your understanding of what the sliding P/E ratio metric is when we apply it in the future. Given how much speculation goes into analysts' forecasts, it's not until the year is over that we know the true P/E of any stock, ETF or index.
Keep this in mind when you see fund providers telling you what their ETF's forward P/E is, as it is based on an estimate of forward earnings that is not only speculative, but often not provided to clients.
What are the current earnings estimates for the S&P 500 in 2023?
Analyst estimates for SPY's earnings, calculated by Fastgraphs, based on data from S&P Global, currently stand at $21.44 per share. Fastgraphs tells us that would represent a 1% drop in SPY earnings compared to last year. (SPY tracks the S&P 500, so it's safe to use as a proxy, which Fastgraphs told me they do now because of the extremely high price S&P Global charges to source the S&P 500 data.)
Currently, Yardeni Research reports that analyst estimates at I/B/E/S call for the S&P 500 to earn $220.09 per share. That would represent earnings growth of 0.09% for the full year.
Yardeni Research, as we mentioned earlier, offers its own forecast, different from the consensus forecasts of analysts. As of May 15, 2023, Yardeni Research forecasts that the S&P 500's 2023 earnings will reach $225 per share. This would represent an increase in earnings of 3.2%.
Here we see a significant difference in optimism, from S&P Global's negative earnings forecast of -1% to Yardeni Research's much more optimistic estimate of 3.2%. Yardeni was the most accurate estimate last October, but there is no way to know if that will be the case this year because no one can know that far in advance how the market will behave during the rest of the year.
You should decide which valuation you want to use to value the S&P 500 and the ETFs that track it. Or you can ignore all these valuations, although if you do, there's no way to estimate its current value.
P/E ratios derived from these three S&P 500 earnings estimates
Using the S&P 500 stock price I recorded at 10:52 AM. May 18, 2023, which was $4175.89 and the corresponding SPY price which was $417.00, the three different current earnings estimates we approach to create the following current P/E ratios.
As you can see, there is now more variance between the different estimates than there was in October 2022. This is to be expected as there are still many months until the end of 2023. So all of these estimates are much more speculative than they were. which we saw in October 2022 towards the end of the year.
How do these P/E ratios compare to the P/E ratios that prevailed in previous market conditions?
In my research, Frprevious articleI have studied the changing P/E ratio of the S&P 500 over several decades. From this I came up with an estimate of which P/E ratios were most characteristic of the index during four different very different types of markets dating back to 2021.
Prevailing historical P/E ratios during 4 different market types
BELOW: Current valuations for 2023 range between a stagnant and healthy market
Looking at these P/E ratios, we can see that all three current P/E ratios we calculated above, based on the three different analyst estimates we have access to, fall within the gap between the S&P's historical P/E 500 characteristic of periods of stagnation without decline and a period in which the market shows healthy growth in corporate earnings.
Based on this historical data, if you believe that the S&P 500's earnings will decline through 2023 and possibly next year, you should conclude that the current price of the S&P 500 is overvalued.
If you believe that S&P 500 earnings will see modest growth this year, as we see at Yardeni Research, then you could say that the current price is giving us a valuation that is out of line with historical Trade data.
BONUS: Current prices for the ETFs I track match typical historical P/E ratios
Using the methodology I've applied in several previous articles, I apply some ratios I've pulled from historical price data to calculate prices for SPY, the Vanguard S&P 500 ETF (NYSEARCA:LET) i Vanguard Total Stock Market ETF (VTI).
The chart below uses the current analyst consensus earnings published by Fastgraphs for the SPY and the current price of the S&P 500 to calculate what prices these ETFs would produce P/E ratios typical of the four types of markets.
Prices of popular ETFs generating selected historical P/E ratios
I've found that the values my calculations give are accurate to plus or minus $2 almost every time I check. The ratios I use to calculate the various factors you see here are as follows.
SPY to S&P 500 price conversion factor = 0.09949 S&P 500 to VOO price conversion factor = .0916 VOO to VTI price conversion factor = .546
I send them to you without claiming that they will always work, but they have helped me a lot since January 2022 when I developed them.
Note that while many investors believe that VTI should behave differently than VOO, I have found that the large role played by it in the top 500 stocks by VTI market cap makes it possible to predict the true price based on VOO's price in most cases.
This article was written by
Although I've done a lot of different things over the course of my long life, I'm best known as the author of best-selling books on business and health. My success came because I am a very curious person who doesn't just follow the herd and believe everything the experts tell us. I'm doing my own research. I collect facts, look at them objectively and draw conclusions. Over the years, I've been surprised at how much of what everyone "knows to be true" is based on poorly designed studies, many of which are impossible to replicate. I approach investing with the same open mind, challenging the orthodoxies that attract the herd, studying how things really work and doing my best to come up with a fact-based approach that works for me and would appeal to those who think it's worth it. I recently researched how the indexes underlying ETFs are constructed, and in doing so I discovered that the way these indexes are constructed ensures that many of the ETFs people buy don't actually do what their titles suggest. I'm also doing my best, in the current very difficult environment, to find relatively safe ways to use the money I use to generate income, money I would otherwise put into CDs. I use valuation concepts and a liberal sprinkling of common sense to find stocks that I believe will not only produce modest amounts of income, but also increase their share price over the next five years.
Analyst disclosure: I/we have a favorable positive position in the shares of VOO, VTI either through share ownership, options or other derivatives. I wrote this article myself and it expresses my own opinion. I do not receive compensation for this (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
I am not a certified professional or a registered investment advisor. I'm just a casual investor with a lot of curiosity who likes to research stocks and share what I find with others. Do not buy or sell any securities you read about here before doing your own research and considering opposing viewpoints.
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