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Executive summary:
- inflation remains low, employment high
- real 12-month trailing S&P earnings growth _dropped_ to a rather
tepid 1%, which breaks a trend of +10% real EPS growth established
a year ago. (the 10-yr median is 10.2%).
- S&P valuations are high with a P/E of 26.5. This is the highest
P/E for the S&P in the past 38 years in my data sample.
- S&P dividend rate (1.5%) is at an all-time low
- the real year-over-year return on the S&P is 32%.
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[The data used in this study is updated each month using values
as of the close of the first Friday in each month. The source for
the data is Barron's Market Lab. This update: March 6, 1998.]
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.
SPXR and EPGR adjust for the inflation rate and calculate the excess
return over the risk-free rate to adjust returns during years that
had high inflation rates, when short-term notes offered attractive
returns.
The current S&P 500 PE (26.5) has moved from moderate to high over the
past 12 months (the 10-year median is 18.1, the 30-year median is 14.7).
The P/E has twice met resistance at levels above 24, that seems to
be setting a valuation ceiling on the S&P.
Earnings growth dropped significantly this month to a tepid 1.6%.
This low year-over-year earnings growth rate, combined with the
high P/E valuation may present some problems for the S&P.
(the 10-yr median is 10.2%, the 30-yr median a modest 1.2%, both
inflation adjusted).
An SPX PE of greater than 20.0 is usually a warning signal that
the S&P is in over-valued territory. 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 12 months.
Unless earnings growth bounces back, and 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: since August-97, 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, this month at 1.50% 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 still at a high level of 32%, but well off the recent high set in
Aug-97, at 43.2%. The current level of real return is in the top 7%
of the past 30 years. The 30-year median is 8.2%; the 10-year median
is 10.9%.
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
9803 1055.69 26.5 1.5 5.1 6.0 162 1.3 1.6 32.0
9802 1012.46 24.9 1.6 5.1 5.9 162 1.3 11.5 29.1
9801 927.69 22.8 1.7 5.1 5.7 162 1.6 11.1 24.6
9712 983.79 24.2 1.6 5.1 6.1 161 1.7 10.8 33.4
9711 927.51 22.9 1.7 5.1 6.4 162 1.8 14.1 32.1
9711 927.51 22.9 1.7 5.1 6.4 162 1.8 14.1 32.1
9710 965.03 23.8 1.6 4.9 6.3 161 1.8 14.0 38.0
9709 929.05 22.9 1.7 5.1 6.6 161 2.2 13.8 41.8
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
9508 559.94 17.2 2.5 5.4 6.9 153 2.6 40.0 22.8
9507 556.37 17.1 2.5 5.5 6.5 152 2.6 40.0 25.1
9506 532.51 16.3 2.6 5.6 6.5 152 2.8 40.1 15.7
9505 520.12 17.0 2.6 5.7 7.0 152 3.0 36.0 16.1
9504 506.42 16.5 2.7 5.8 7.4 151 2.7 35.9 13.5
9503 485.42 15.8 2.8 5.7 7.6 151 2.9 34.5 4.4
9502 478.64 17.5 2.8 5.8 7.6 151 2.9 30.2 1.7
9501 460.68 16.9 2.9 5.8 7.8 150 2.8 30.1 -2.1
9412 453.30 16.6 2.9 5.4 8.0 150 2.7 30.5 -2.5
9411 462.28 18.3 2.8 5.1 8.0 150 2.7 27.0 0.7
9410 455.10 18.1 2.9 4.9 7.8 149 2.6 27.0 -1.2
9409 470.99 18.7 2.8 4.6 7.5 149 3.2 26.3 1.6
9408 457.09 20.1 2.8 4.3 7.5 149 2.9 11.2 1.8
9407 446.20 19.6 2.9 4.2 7.5 148 2.8 11.4 0.1
9406 460.13 20.3 2.8 4.2 7.4 148 2.5 11.3 2.5
9405 447.82 20.5 2.9 4.0 7.8 147 2.3 12.0 1.8
9404 447.10 20.4 2.9 3.6 7.2 147 2.4 12.3 1.8
9403 464.74 21.0 2.8 3.4 6.7 147 2.5 12.1 4.5
9402 469.81 23.0 2.7 3.0 6.3 147 2.5 10.4 4.9
9401 469.90 23.0 2.7 3.1 6.3 146 2.5 10.4 10.0
9312 464.89 22.8 2.7 3.1 6.3 146 2.7 10.1 7.8
9311 459.57 23.8 2.7 3.1 6.0 146 2.7 10.4 10.4
9310 461.29 23.9 2.7 2.9 6.1 146 2.8 10.3 12.7
9309 461.34 23.9 2.7 3.0 6.2 145 2.5 10.7 11.2
9308 448.68 22.6 2.8 3.1 6.6 145 2.8 19.3 7.3
9307 445.84 22.5 2.8 3.0 6.8 144 2.8 19.2 8.5
9306 450.06 22.7 2.8 3.1 7.0 144 3.0 17.9 8.9
9305 442.30 23.2 2.8 2.9 6.9 144 3.2 15.8 7.0
9304 441.39 23.1 2.8 3.0 6.8 144 3.2 15.9 9.7
9303 446.11 23.2 2.8 3.0 6.9 144 3.1 15.9 10.2
9302 448.93 24.9 2.8 3.0 7.2 143 3.2 -2.0 8.9
9301 429.04 23.8 2.9 3.1 7.4 143 3.3 -2.3 2.0
9212 432.06 23.9 2.9 3.3 7.6 142 2.9 -2.2 14.3
9211 417.58 24.5 3.0 3.0 7.6 142 3.0 -15.0 6.8
9210 410.47 24.1 3.1 2.7 7.4 142 3.2 -15.1 7.7
9209 417.08 24.5 3.0 3.2 7.4 141 3.0 -15.1 7.3
9208 418.87 25.9 3.0 3.2 7.5 141 3.1 -25.2 8.2
9207 411.77 25.4 3.0 3.6 7.8 140 3.2 -25.2 10.2
9206 413.47 25.3 3.0 3.8 7.9 140 3.1 -24.5 9.1
9205 412.53 25.8 3.0 3.7 8.0 140 3.0 -27.4 8.5
9204 401.55 25.1 3.0 4.1 8.0 139 3.2 -27.6 7.1
9203 404.44 25.1 3.0 4.0 7.9 139 3.2 -27.7 9.3
9202 411.08 23.1 3.0 3.9 7.7 139 2.8 -20.3 20.8
9201 419.33 23.4 2.9 3.9 7.5 138 2.6 -19.8 32.2
9112 379.09 21.1 3.2 4.4 8.0 138 3.1 -20.0 16.4
9111 391.32 20.1 3.1 5.0 8.1 138 3.0 -11.1 26.6
9110 381.24 19.6 3.2 5.1 7.9 137 2.9 -11.1 23.6
9109 389.10 20.0 3.1 5.3 8.1 137 3.4 -11.7 20.8
9108 387.18 18.4 3.1 5.6 8.4 137 3.8 -6.7 12.0
9107 374.08 17.8 3.2 5.6 8.5 136 4.4 -7.3 3.3
9106 379.43 18.1 3.2 5.6 8.3 136 4.7 -7.4 3.1
9105 380.80 17.8 3.2 5.6 8.2 136 5.0 -11.0 11.0
9104 375.35 17.6 3.2 6.0 8.3 135 4.9 -10.9 8.9
9103 370.46 17.1 3.3 6.0 8.0 135 5.1 -10.2 8.8
9102 343.05 15.8 3.6 6.2 8.2 135 5.3 -12.9 1.9
9101 321.00 14.8 3.8 6.5 8.3 135 5.7 -13.2 -10.9
9012 327.75 15.1 3.8 7.1 8.4 134 6.1 -13.2 -9.0
9011 311.85 14.7 3.9 7.1 8.8 134 6.3 -20.7 -10.1
9010 311.50 14.7 3.9 7.2 9.1 133 6.3 -20.7 -13.3
9009 323.40 15.2 3.8 7.4 9.0 133 6.2 -20.5 -11.1
9008 344.86 15.9 3.5 7.5 8.5 132 5.6 -18.7 -2.2
9007 358.42 16.5 3.4 7.7 8.5 130 4.8 -15.4 8.8
9006 363.16 16.8 3.3 7.8 8.6 130 4.7 -17.7 10.9
9005 338.39 14.8 3.5 7.9 9.0 129 4.4 -12.1 6.9
9004 340.08 14.9 3.5 7.8 8.5 129 4.7 -9.7 11.3
9003 335.54 14.7 3.5 8.0 8.6 128 5.1 -8.1 13.3
9002 330.92 14.0 3.5 7.8 8.4 128 5.3 -6.0 10.5
9001 352.19 14.8 3.3 7.6 8.0 127 5.2 -5.9 21.8
8912 350.63 14.8 3.3 7.6 7.9 126 4.6 -4.6 25.2
8911 337.62 13.4 3.4 7.8 7.9 126 4.7 1.8 23.2
8910 349.15 13.8 3.3 7.7 8.1 126 4.5 2.0 24.7
8909 353.73 14.0 3.2 7.7 8.2 125 4.3 15.7 30.6
8908 344.73 13.7 3.3 7.9 7.9 125 4.7 15.1 29.0
8907 324.90 13.3 3.4 7.9 8.3 124 5.0 11.1 19.0
8906 323.75 12.9 3.5 8.2 8.5 124 5.2 11.5 17.6
8905 313.93 12.6 3.5 8.4 8.9 124 5.4 10.3 20.5
8904 302.33 12.5 3.6 8.7 9.2 123 5.1 7.2 13.3
8903 292.09 12.3 3.7 8.8 9.3 122 5.0 18.5 8.3
8902 294.01 12.3 3.3 8.5 9.1 122 4.8 19.7 12.5
8901 284.28 11.9 3.4 8.3 9.1 121 4.7 19.9 13.0
8812 276.98 11.7 3.5 8.1 9.1 120 4.4 32.9 14.2
8811 271.30 11.5 3.6 7.7 9.0 120 4.2 33.1 10.1
8810 277.40 11.7 3.5 7.3 8.9 120 4.3 33.0 -2.0
8809 268.59 12.8 3.5 7.2 9.1 120 4.2 28.0 -16.9
8808 264.20 12.6 3.5 7.0 9.3 119 4.0 28.2 -20.8
8807 269.04 12.8 3.5 6.7 9.2 118 4.2 28.1 -14.4
8806 270.68 12.6 3.4 6.5 9.0 118 3.9 44.3 -11.1
8805 256.11 11.9 3.6 6.3 9.2 117 3.9 44.3 -12.2
8804 262.61 12.2 3.5 5.9 8.9 117 3.9 44.4 -10.0
8803 265.74 13.9 3.5 5.7 8.6 116 3.9 21.3 -10.0
8802 258.12 13.5 3.6 5.7 8.4 116 3.9 21.3 -8.9
8801 249.18 13.1 3.7 5.9 8.9 116 4.1 21.1 -6.6
8712 240.96 14.1 3.7 5.8 9.1 115 4.4 9.9 -4.0
8711 245.00 14.4 3.7 5.8 9.0 115 4.5 9.8 -1.1
8710 280.15 16.4 3.2 6.4 9.6 115 4.5 9.8 16.9
8709 318.66 20.3 2.8 6.3 9.6 115 4.3 -1.5 32.6
8708 329.35 21.0 2.7 6.0 9.0 114 4.3 -1.5 33.2
8707 310.09 19.7 2.8 5.8 8.7 114 3.9 -1.2 28.5
8706 301.37 21.1 2.9 5.7 8.6 114 3.7 -4.1 22.4
8705 289.12 20.2 3.0 5.8 8.8 113 3.8 -4.2 20.8
8704 289.31 20.2 3.0 5.8 8.3 113 3.8 -4.3 21.1
8703 292.46 19.3 2.9 5.6 7.6 112 3.0 4.0 26.4
8702 280.92 18.6 3.0 5.6 7.7 112 2.1 4.9 30.1
8701 264.50 17.5 3.2 5.5 7.6 111 1.4 5.7 30.1
8612 248.61 16.7 3.4 5.5 7.7 111 1.1 2.6 23.2
8611 245.08 16.5 3.4 5.3 7.8 110 1.3 2.5 27.5
8610 237.36 16.0 3.5 5.2 8.0 110 1.5 2.2 30.9
8609 238.26 15.6 3.4 5.2 8.1 110 1.8 -2.4 32.7
8608 244.99 16.0 3.4 5.6 7.7 110 1.6 -2.1 33.5
8607 240.18 15.7 3.4 5.8 7.9 109 1.6 -2.2 27.9
8606 245.30 17.1 3.4 6.2 8.2 109 1.7 -8.0 33.0
8605 238.46 16.6 3.4 6.1 8.0 109 1.6 -7.8 32.5
8604 237.98 16.5 3.4 6.1 7.6 109 1.6 -7.9 35.3
8603 232.32 16.4 3.5 6.6 8.1 109 2.3 -15.2 32.2
8602 219.37 15.5 3.7 7.0 9.1 109 3.2 -15.9 22.6
8601 208.19 14.7 3.9 7.0 9.5 110 3.9 -16.5 22.0
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
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