Going into the second half of 2011, the stock market’s not only inexpensive, but growing well too. I see good things ahead for the rest of the year, here’s why.
Ten-Year Chart
To the right is a ten-year chart of the S&P 500 — what many people consider the benchmark for the stock market.
2011 profits for the S&P are expected to clock in at $96 this year. This figure would be 13% better than last year and a new record high.
What gets me about this chart is the S%P peaked in November 2007 at 1576. If the S&P 500 makes $96 this year — 9% higher than the previous high of $88 in 2006 — then the stock market index should be at a record high too.
The S&P 500 is currently at 1280. A move to 1576 would be a 23% gain. I’ll take it.I think we deserve it.
Over the last ten-years S&P 500 profits have grown at 9% a year compounded. The index is at a 0% return during that time. These numbers don’t match because as the market was high at the beginning of the decade.
S&P 500 Earnings and Dividend Table
Below is a table listing the S&P 500 earnings, closing price of the index and dividends paid each year. I calculated the P/E ratio at the end of the year and the yield.
| Year | S&P 500 Close | S&P Profits | P/E | Dividends | Yield |
| 1988 | 277.72 | 24.12 | 12 | $9.73 | 3.50% |
| 1989 | 353.40 | 24.32 | 15 | $11.05 | 3.13% |
| 1990 | 330.22 | 22.65 | 15 | $12.09 | 3.66% |
| 1991 | 417.09 | 19.30 | 22 | $12.20 | 2.93% |
| 1992 | 435.71 | 20.87 | 21 | $12.38 | 2.84% |
| 1993 | 466.45 | 26.90 | 17 | $12.58 | 2.70% |
| 1994 | 459.27 | 31.75 | 14 | $13.18 | 2.87% |
| 1995 | 615.93 | 37.70 | 16 | $13.79 | 2.24% |
| 1996 | 740.74 | 40.63 | 18 | $14.90 | 2.01% |
| 1997 | 970.43 | 44.01 | 22 | $15.49 | 1.60% |
| 1998 | 1229.23 | 44.27 | 28 | $16.20 | 1.32% |
| 1999 | 1469.25 | 51.68 | 28 | $16.69 | 1.14% |
| 2000 | 1320.28 | 56.13 | 24 | $16.27 | 1.23% |
| 2001 | 1148.08 | 38.85 | 30 | $15.74 | 1.37% |
| 2002 | 879.82 | 46.04 | 19 | $16.08 | 1.83% |
| 2003 | 1111.92 | 54.69 | 20 | $17.39 | 1.56% |
| 2004 | 1211.92 | 67.68 | 18 | $19.44 | 1.60% |
| 2005 | 1248.29 | 76.45 | 16 | $22.22 | 1.78% |
| 2006 | 1418.30 | 87.72 | 16 | $24.88 | 1.75% |
| 2007 | 1468.36 | 82.54 | 18 | $27.73 | 1.89% |
| 2008 | 903.25 | 65.47 | 14 | $28.05 | 3.11% |
| 2009 | 1115.10 | 60.80 | 18 | $22.31 | 2.00% |
| 2010 | 1257.64 | 85.28 | 15 | $23.13 | 1.84% |
| 2011 as of 6/27/11 | 1280.10 | 95.95e | 13 | N/A | N/A |
S&P 500 Price Target
To get a price target on the market, I have to multiply the expected profits by a fair P/E.
When choosing a fair value P/E, I want to look at regular conditions — which we are in now. Some of these years you can’t make a straight comparison to. Like 2003. The market took of in March and by the end of 2003 we all knew the bear market of 2000-2002 was in the rear view mirror. The market anticipated good things and went so high the P/E got to 20. The next two years things settled down, the good profits came in as expected, and the P/E fell to 18 then 16.
2005 & 2006 were “fair” years for the market in that there wasn’t any funny stuff going on (dot com bubble, market crash, financial crisis, meconomic recovery, etc). 2007 had a wild end and the market shot up got a little overvalued, so the P/E was too high then. In 2008 & 2009 we were feeling the effects of the recession and you can’t compare this period to that one.
Bottom Line
I think a fair P/E for the S&P 500 is 16. 2005 & 2006 had P/Es of 16 and I think there were normal conditions then.
The current P/E of 13 is a lot lower than it should be. A 16 P/E on current estimates of $95.95 gets us a S&P 500 price target of 1535 — 20% higher than now. Keep in mind this is a year end fair value. We still have six months to move.
2012 looks like a good year too. Current estimates are for $104 in profits, 8% higher than this year. But this can’t be trusted. We don’t know what lies ahead. But what I see right now looks good.
