Chapter 14 Charts: Predicting Valuation · 2016-10-11 · STOCK VALUATION MODEL (using 10-year...
Transcript of Chapter 14 Charts: Predicting Valuation · 2016-10-11 · STOCK VALUATION MODEL (using 10-year...
Predicting the MarketsChapter 14 Charts:
Predicting ValuationYardeni Research, Inc.
October 11, 2016
Dr. Edward Yardeni516-972-7683
Mali Quintana480-664-1333
Please visit our sites atwww.yardeni.comblog.yardeni.com
thinking outside the box
Table Of Contents Table Of ContentsTable Of Contents
October 11, 2016 / Chapter 14 Charts: Predicting Valuation www.yardeni.com
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Predicting Valuation 1-18
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 205
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SepSep
FORWARD P/E RATIOS FOR S&P 500 STOCK PRICE INDEX*
Forward P/EsS&P 500 (16.6)
S&P 500 Technology (16.6)
* S&P 500 stock price index divided by S&P 500 12-month forward consensus expected operating earnings.Source: Thomson Reuters I/B/E/S.
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Figure 1.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 201
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S&P 500 FORWARD EARNINGS YIELD & NOMINAL 10-YEAR TREASURY BOND YIELD
10-Year US TreasuryBond Yield
S&P 500 Forward Earnings Yield*
* S&P 500 12-month forward consensus expected operating earnings divided by S&P 500 stock price indexSource: Thomson Reuters I/B/E/S and Board of Governors of the Federal Reserve System.
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Figure 2.
Predicting Valuation
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2075
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3225
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53256375742584759525
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4275
53256375742584759525
Sep
SepSTOCK VALUATION MODEL (using 10-year Treasury bond yield)(ratio scale)
S&P 500 Fair-Value Price*
S&P 500 Stock Price Index
* S&P 500 12-month forward consensus expected operating earnings divided by 10-year US Treasury bond yield.Source: Thomson Reuters I/B/E/S and Board of Governors of the Federal Reserve System.
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Figure 3.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20-100
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STOCK VALUATION MODEL (using 10-year Treasury bond yield)*(percent overvalued or undervalued)
* S&P 500 stock price index divided by S&P 500 fair-value price defined as S&P 500 12-month forward consensus expected operating earningsdivided by 10-year US Treasury bond yield converted to percentage.Source: Thomson Reuters I/B/E/S and Board of Governors of the Federal Reserve System.
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Figure 4.
Predicting Valuation
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85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 208
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S&P 500 LONG-TERM CONSENSUS EXPECTED EARNINGS GROWTH(percent annual rate)
LTEG*
* LTEG is 5-year forward consensus expected earnings growth.Source: Thomson Reuters I/B/E/S.
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Figure 5.
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 208
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S&P 500 LONG-TERM CONSENSUS EXPECTED EARNINGS GROWTH(percent annual rate)
LTEG*S&P 500 (12.5)
S&P 500 Information Technology (13.1)
* LTEG is 5-year forward consensus expected earnings growth.Source: Thomson Reuters I/B/E/S.
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Figure 6.
Predicting Valuation
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 200
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CORPORATE BOND YIELDS (percent)
Corporate Bond Yields*
Average Corporate Yield (3.9)
AA-AAA Corporate Bond Yield (3.6)
BBB-A Corporate Bond Yield (4.3)
* Moody’s data for Aaa and Baa yields through 1996, then BoA Merrill Lynch data for AA-AAA and BBB-A yieldsSource: Federal Reserve Board and Haver Analytics.
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Figure 7.
54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 200
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YIELD SPREAD: CORPORATE BOND* & 10-YEAR TREASURY(basis points)
Sep
* Corporate bond yield is average of Moody’s Aaa and Baa yields through 1996, then average of BoA Merrill Lynch data for AA-AAA and BBB-A yields.Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Federal Reserve Board and Haver Analytics.
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Figure 8.
Predicting Valuation
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 200
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S&P 500 FORWARD EARNINGS YIELD & CORPORATE BOND YIELD
Corporate Bond Yield** (3.9)
S&P 500 Forward Earnings Yield* (6.0)
* S&P 500 12-month forward consensus expected operating earnings divided by S&P 500 stock price index.** Corporate bond yield is average of Moody’s Aaa and Baa yields through 1996, then average of BoA Merrill Lynch data for AA-AAA and BBB-A yields.
Source: Federal Reserve Board and Haver Analytics.
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Figure 9.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 200
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x0.0
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S&P 500 FORWARD EARNINGS YIELD & CORPORATE BOND YIELD
Corporate Bond Yield less LTEGweighted by 0.0, 0.1, and 0.2**
S&P 500 Forward Earnings Yield* (6.0)
* S&P 500 12-month forward consensus expected operating earnings divided by S&P 500 stock price index.** Corporate bond yield (average of Moody’s Aaa and Baa yields through 1996, then average of BoA Merrill Lynch data for AA-AAA and BBB-A yields)
less analysts’ consensus of S&P 500 long-term earnings growthSource: Thomson Reuters I/B/E/S, Federal Reserve Board, and Haver Analytics.
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Figure 10.
Predicting Valuation
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2075
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STOCK VALUATION MODEL (using average of Aaa and Baa corporate bond yield)(ratio scale)
S&P 500 Stock Price Index
S&P 500 Fair-Value Price*
* S&P 500 forward consensus expected operating earnings divided by corporate bond yield (average of Moody’s Aaa and Baa yields through 1996,then average of BoA Merrill Lynch data for AA-AAA and BBB-A yields).Source: Thomson Reuters I/B/E/S, Federal Reserve Board, and Haver Analytics.
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Figure 11.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20-100
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STOCK VALUATION MODEL(percent overvalued or undervalued)
Using Treasury Bond* (-72.6)
Using Corporate Bond** (-34.0)
* S&P 500 12-month forward consensus expected operating earnings divided by 10-year US Treasury bond yield converted to percentage.** S&P 500 12-month forward consensus expected operating earnings divided by corporate bond yield (average of Moody’s Aaa and Baa yields through 1996,
then average of BoA Merrill Lynch data for AA-AAA and BBB-A yields converted to percentage.Source: Thomson Reuters I/B/E/S, Federal Reserve Board, and Haver Analytics.
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Figure 12.
Predicting Valuation
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20183
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S&P 500 FORWARD EARNINGS YIELD & CORPORATE BOND YIELD(percent)
Corporate Bond Yield* (3.9)
S&P 500 Forward Earnings Yield** (6.0)
* Corporate bond yield is average of Moody’s Aaa and Baa yields through 1996, then average of BoA Merrill Lynch data for AA-AAA and BBB-A yields.** S&P 500 12-month forward consensus expected operating earnings divided by S&P 500 stock price index.
Source: Thomson Reuters I/B/E/S, Standard & Poor’s, Federal Reserve Board, and Haver Analytics.
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Figure 13.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180
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S&P 500 BUYBACKS(billion dollars, annualized)
Source: Standard & Poor’s.
yard
eni.
com
Figure 14.
Predicting Valuation
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20-2
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S&P 500 EARNINGS YIELD & REAL BOND YIELD
Real 10-year Treasury Yield*
S&P 500 Forward Earnings Yield**
10-Year TIPS Yield(weekly)
* 10-year US Treasury bond yield minus median expected CPI inflation rate for next 10 Years using Philadelphia Fed Survey of Professional Forecastersdata (monthly series interpolated from quarterly data starting as two quarters per year during Q4-1979 until Q4-1991 when the data continuewith four quarters a year).
** S&P 500 12-month forward consensus operating earnings divided by S&P 500 stock price index.Source: Board of Governors of the Federal Reserve System, US Treasury, Thomson Reuters I/B/E/S, and Federal Reserve Bank of Philadelphia.
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Figure 15.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 200
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Average = 5.0
S&P 500 EARNINGS RISK PREMIUM*(percent)
* S&P 500 forward earnings yield minus the real interest rate defined as the nominal 10-year Treasury yield minus median expected CPI inflation ratefor next 10 Years using Philadelphia Fed Survey of Professional Forecasters data (monthly series interpolated from quarterly data starting astwo quarters per year during Q4-1979 until Q4-1991 when the data continue with four quarters a year).Source: Board of Governors of the Federal Reserve System, US Treasury, Thomson Reuters I/B/E/S, and Federal Reserve Bank of Philadelphia.
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Figure 16.
Predicting Valuation
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 200
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EXPECTED INFLATION: SURVEY OF PROFESSIONAL FORECASTERS
CPI: Ex Food & Energy (2.3)
Professional Forecasters* (2.2)
Source: Bureau of Labor Statistics and Federal Reserve Bank of Philadelphia.
* Median forecast of year-over-year CPI inflation rate over the next 10 years. Monthly series interpolated from quarterly data starting as two quartersper year during Q4-1979 until Q4-1991 when the data continue with four quarters a year.
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Figure 17.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017.0
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MEASURES OF EXPECTED INFLATION(percent)
Expected Inflation
10-Year TIPS** (1.6)
Survey of Professional Forecasters* (2.2)
Source: Board of Governors of the Federal Reserve System and Federal Reserve Bank of Philadelphia.** Nominal 10-year Treasury yield minus 10-year TIPS yield.
* Median forecast of year-over-year CPI inflation rate over the next 10 years. Monthly series interpolated from quarterly data starting as two quartersper year during Q4-1979 until Q4-1991 when the data continue with four quarters a year.
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Figure 18.
Predicting Valuation
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35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 215
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S&P 500 P/E BASED ON TRAILING EARNINGS
Average = 15.1
Trailing P/E* (21.1)
* Using quarterly average of daily data for S&P 500 price index, and 4-quarter trailing reported earnings through Q3-1988, then operating earnings.Source: Standard & Poor’s Corporation.
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Figure 19.
35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21-5
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S&P 500 P/E BASED ON TRAILING EARNINGS vs. CPI
Trailing P/E* (21.1)
CPI(yearly percent change) (1.1)
* Using quarterly average of daily data for S&P 500 price index, and 4-quarter trailing reported earnings through Q3-1988, then operating earnings.Source: Standard & Poor’s Corporation and Bureau of Economic Analysis.
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Figure 20.
Predicting Valuation
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53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 210
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S&P 500 P/E BASED ON TRAILING EARNINGS vs. 10-YEAR TREASURY BOND YIELD
Trailing P/E* (21.1)
10-Year Bond Yield(percent) (1.6)
* Using quarterly average of daily data for S&P 500 price index, and 4-quarter trailing reported earnings through Q3-1988, then operating earnings.Source: Standard & Poor’s Corporation and Federal Reserve Board.
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Figure 21.
53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 210
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S&P 500 EARNINGS YIELD vs. 10-YEAR TREASURY BOND YIELD(percent)
S&P 500 Earnings Yield* (4.7)
10-Year Bond Yield (1.6)
* Using quarterly average of daily data for S&P 500 price index, and 4-quarter trailing reported earnings through Q3-1988, then operating earnings.Source: Standard & Poor’s Corporation and Federal Reserve Board.
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Figure 22.
Predicting Valuation
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89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 208
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Sep
S&P 500 P/E RATIOSS&P 500 P/Es
Trailing (using operating earnings)* (21.1)Forward** (16.6)
* Using 4-quarter trailing operating earnings.** S&P 500 stock price index divided by S&P 500 12-month forward consensus expected operating earnings.
Source: Thomson Reuters I/B/E/S and Standard & Poor’s.
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Figure 23.
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S&P 500 INDEX
S&P 500 PEG RATIO
P/E* (16.6)
LTEG** (12.5)
PEG*** (1.3)
* P/E = price-to-earnings ratio using mid-month price and 12-month forward consensus earnings expectations.** LTEG = consensus median 5-year expected earnings growth.
*** PEG = P/E divided by LTEG.Source: Thomson Reuters I/B/E/S.
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Figure 24.
Predicting Valuation
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018.7
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Sep
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* Price divided by 12-month forward consensus expected operating earnings per share.** Price divided by 12-month forward consensus expected sales per share.
Source: Thomson Reuters I/B/E/S.
S&P 500 VALUATION MEASURES
Forward P/E* (16.61)
Forward P/S** (1.77)
Figure 25.
52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20.0
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STOCK MARKET CAPITALIZATION RATIOS
Q2S&P 500 Market Cap(as a ratio of S&P 500 Revenues) (1.84)
US Equity Market Capitalization Ex Foreign Issues(as a ratio of nominal GNP) (1.58)
Note: Shaded red areas denote S&P 500 bear market declines of 20% or more. Yellow areas show bull markets.Source: Federal Reserve Board, Flow of Funds Accounts, and Standard & Poor’s Corporation.
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Figure 26.
Predicting Valuation
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93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18.7
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Sep
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* S&P 500 index divided by 52-week forward consensus expected revenues per share for S&P 500.Source: Thomson Reuters I/B/E/S and Federal Reserve Flow of Funds Accounts.
S&P 500 PRICE-TO-SALES RATIOS&P 500 Market Cap(as a ratio of S&P 500 Revenues (1.84)
Forward P/S* (1.77)
Figure 27.
52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20.0
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TOBIN’S Q FOR NONFINANCIAL CORPORATIONS*(ratio)
Q2
Q2
Actual Q (0.97)
Adjusted Q** (1.35)
* Ratio of the market value of equities to the net worth of the corporations including real estate and structures at market value and equipment,intellectual property products, and inventories at replacement cost.
Source: Federal Reserve Board Financial Accounts of the United States.
** Actual divided by average since 1952.Note: Shaded red areas denote S&P 500 bear market declines of 20% or more. Yellow areas show bull markets.
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Figure 28.
Predicting Valuation
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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 205
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S&P 500 FORWARD P/E & RULE OF 20 P/E BASED ON CPI INFLATION RATE(monthly)
S&P 500 Forward P/E* (16.6)
20 minus CPI Inflation Rate(yearly percent change) (18.9)
* P/E = price-to-earnings ratio using mid-month price and 12-month forward consensus earnings expectations.Source: Thomson Reuters I/B/E/S and Bureau of Labor Statistics.
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Figure 29.
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 205
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FORWARD PE RATIO FOR S&P 500 vs. MISERY INDEX
Misery Index*
S&P 500 Forward P/E**
* Yearly percent change in core personal consumption expenditures deflator plus unemployment rate.
Source: US Department of Commerce, Bureau of Economic Analysis and US Department of Labor, Bureau of Labor Statistics, and Thomson Reuters I/B/E/S.** Price divided by 12-month forward consensus expected operating earnings per share.
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Figure 30.
Predicting Valuation
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46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 2020
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S&P DIVIDEND PAYOUT RATIO*(percent)
S&P 500 (51.2)S&P Industrials Composite (58.2)
* Four-quarter trailing dividends per share divided by four-quarter trailing reported earnings.S&P 500 dividend payout not available from Q4-2008 to Q3-2009 because dividends exceeded earnings.Source: Standard & Poor’s Corporation.
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Figure 31.
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 2065
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S&P 500 COMPANIES PAYING A DIVIDEND(percent of total)
Source: Standard & Poor’s Corporation.
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Figure 32.
Predicting Valuation
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70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 200
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Q3S&P 500 DIVIDEND YIELD(trailing 4-quarter sum)
Invested in 1970 (52.2)
Invested in 1980 (33.5)
Invested in 1990 (13.6)
Invested in 2000 (3.3)
Source: Standard & Poor’s.
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Figure 33.
52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 200
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S&P 500 DIVIDEND YIELD vs. 10-YEAR US TREASURY BOND YIELD(percent)
Bond Yield (1.63)
S&P 500 Dividend Yield* (2.08)
* S&P 500 four-quarter trailing dividends per share divided by quarterly closing value of the S&P 500 index.Source: Standard & Poor’s and Board of Governors of the Federal Reserve System.
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Figure 34.
Predicting Valuation
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45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 2010
710
1410
2110
2810351042104910
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2810351042104910 1%
2%
3%
4% 5% 6%
S&P 500 INDEX AND DIVIDEND YIELD(ratio scale)
S&P 500 Index10/05/16
Blue Angels Implied Dividend Yield*
* Blue lines show hypothetical values of S&P 500 stock price index using actual S&P 500 dividend (4-quarter trailing sum) divided by dividend yieldsfrom 1.0% to 6.0%Source: Standard & Poor’s.
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Figure 35.
45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20.7
50.7
100.7
150.7
200.7250.7
.7
50.7
100.7
150.7
200.7250.7
Q3
S&P 500 TRAILING 4-QUARTER DIVIDENDS WITH 5% TO 8% CAGR GROWTH PATHS(base period Dec 1946 = 0.71, ratio scale)
5%
6%
7%
8%
Standard & Poor’s Corporation.
Figure 36.
Predicting Valuation
Page 18 / October 11, 2016 / Chapter 14 Charts: Predicting Valuation www.yardeni.com
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