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Executive summary:
- inflation remains low, employment high
- real 12-month trailing S&P earnings growth rate of 14%, remains strong
- highest year-over-year return on the S&P registered in 14 years
- S&P valuations are high with a P/E of 22.9
- S&P dividend rate (1.7%) near an all-time low (set last month at 1.6%)
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[the data used in this study was last updated the first Friday
in September: September 5, 1997]
This study looks at the S&P 500 (SPX), its P/E ratio, dividend
rate, the T-bill rate, and inflation as measured by CPI.
Three values are calculated:
INFLAT% - inflation rate, measured as year-over-year percent
increase/decrease in the CPI
EPGR - year-over-year S&P EPS growth rate, inflation adjusted
SPXR - year-over-year S&P price growth rate, including dividends,
inflation adjusted.
We adjust for the inflation rate and calculate the excess return
over the risk-fee rate to de-rate returns during years that had
high inflation rates, or when short-term notes offered attractive
returns.
The current S&P 500 PE (22.9) has moved from moderate to high over the
past six months (the 10-year median is 17.8, the 30-year median is 14.5).
Over the past three months, the year-over-year real earnings growth
is a strong 14%, backing off a bit from the 16% rate set two months
ago. One thing that is working in the market's favor is that
year-over-year earnings comparisons are getting easier because
the earnings growth a year ago was modest, and declining.
With the encouraging improvement in S&P earnings, one of the risks
of a major over-valuation, and subsequent sell-off has been reduced.
Still, in recent times an SPX PE of greater than 20.0 was a definite
warning signal. 1992 had PE's as high as 25, but that period was
the beginning of an economic expansion and there were also many
accounting write offs taken in that period. 1987 can serve as a
recent time period with market dynamics comparable to now -- in
that period a PE of 21.1 was the highest PE recorded, P/E's have
been above that level, now, for the past 5 months.
Unless earnings continue to come in strongly, while inflation
stays low, the S&P is currently over-valued, and at the high
end of its valuation range, based upon the P/E.
Speaking of inflation: this month, inflation as measured by the CPI
registered a year-over-year level of less than 2% for the first time
since January 1987. Some analysts are predicting that inflation
will remain low, others are afraid that this may be as good as it
gets, and inflation is likely to pick up from. here.
It is worth noting in passing, the S&P div. yield set a
new all time low, last month at 1.63% The 10-year median is 3%.
Bullish analysts are quick to mention that many companies have
have changed their focus from dividends to earnings. Also, companies
increasingly use stock buy-backs as a method of increasing shareholder
return.
The SPXR (annual return, including divs., adjusted for inflation) column
is at a very high level of 42.5%. This exceeds the 34% return sustained
during 1995, and is the highest return level recorded in any other month
during the past 11 years, except the previous month. The 42.5% return is
in the top 2% of all real annual returns registered over the past 31 years.
Returns exceeding 39% haven't been seen since 1983, in fact.
CONCLUSION: We're very near a top, unless (1) the market becomes
comfortable with even higher P/E levels, or (2) earnings continue
to grow and effectively lower the trailing P/E, making
room for further upward adjustments in price.
DATE SPX PE DIV TBILL TBOND CPI INFLAT% EPGR SPXR
9709 929.05 22.9 1.7 5.1 6.6 160 1.7 14.3 42.5
9708 947.14 23.5 1.6 5.1 6.4 160 2.0 15.8 43.2
9707 916.92 22.8 1.7 5.1 6.6 160 2.2 15.6 39.5
9706 858.01 21.3 1.8 4.9 6.8 160 2.3 15.6 27.3
9705 812.97 21.0 1.9 5.2 6.9 160 2.2 11.5 26.7
9704 757.90 19.6 2.0 5.2 7.1 160 2.5 11.0 15.3
9703 804.97 20.8 1.9 5.1 6.8 160 2.5 10.9 24.6
9702 789.56 21.9 1.9 5.0 6.7 159 3.0 -0.6 23.2
9701 748.03 20.8 2.0 5.1 6.7 159 3.0 -1.8 20.4
9612 739.60 20.5 2.0 5.0 6.5 159 3.3 -1.3 20.1
9611 703.77 20.2 2.1 5.0 6.7 159 3.3 -1.8 18.2
9610 701.46 20.1 2.1 5.0 6.7 158 3.0 -1.5 19.7
9609 655.68 18.8 2.3 5.2 7.1 158 3.0 -2.2 15.7
9608 662.49 19.5 2.2 5.2 6.7 157 2.9 1.5 17.9
9607 657.44 19.3 2.2 5.1 7.2 157 3.2 1.3 17.4
9606 673.31 19.8 2.2 5.1 7.0 157 3.0 1.3 26.0
9605 641.63 18.9 2.2 5.0 7.1 157 3.1 7.5 22.8
9604 655.86 19.3 2.2 5.1 6.8 156 3.2 7.4 28.8
9603 644.37 18.9 2.2 4.9 6.4 156 2.8 8.2 32.7
9602 635.84 18.1 2.2 5.0 6.2 154 2.3 25.7 33.5
9601 616.71 17.3 2.3 5.0 6.0 154 2.7 26.8 34.1
9512 609.98 17.3 2.3 5.3 6.1 153 2.5 25.9 35.1
9511 590.57 17.1 2.4 5.3 6.3 154 2.6 33.1 28.0
9510 582.49 16.9 2.4 5.1 6.5 154 2.8 32.9 28.1
9509 563.84 16.3 2.5 5.3 6.1 153 2.5 34.0 20.0
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
|