XJO - Bear Posts only (Factors which might cause the markets to fall), page-8055

- S&P500 Fair Value => 3,500 -

"At its worst , the SPX PE ratio fell below 5 prior to 1920. No reason it could not undershoot to that level again if things get really chaotic during a crash."

Yes, that is the big question? To work out the appropriate PE ratio for the S&P500 one needs to estimate the market's forecast Equity Risk Premium (ERP). The ERP = S&P 500 earnings yield minus the 10yr real Treasury yield. - No doubt, this is what the instos are doing.

When investors place their money in stocks rather than bonds, they expect a higher rate of return for taking on said risk. After all, investors are not guaranteed a positive return in stocks. To forecast the ERP all the perceived risks have to be factored in, including the risk of a recession in the US.

There are formulas for calculating the market's future Risk Premium and there is a good article on thishere on SeekingAlpha.com, written by Hindsight Investor about 8 month ago (in June 2022). They estimated fair value for the S&P 500 then to be around 3,400. That was 16% below the S&P500's value then. It did go down. In October the S&P500 reached 3583 (about 5% above their target). It is hard to say if the S&P500 will drop by that much now and reach their target, or if the bulls will take control again? But it could be taken as a basement bargain price for the S&P500.

They estimated the ERP now to be about 7%, and PE ratio to be 15. Both the S&P500 and PE ratio can be expected to appreciate by 7% p.a. (excluding dividends) for the decades to come. This is shown in the chart below. However, they also said that the market could go sideways for a year or two while the fed waits for its 2% inflation target to be reached and then jump up. They suggest buying the S&P500 when it dips below the blue line (or PE ratio dips below the orange line) for maximum gain.

So if we believe Hindsight Investor's reckoning, the S&P500 could drop 500 points to about 3,500 before the instos load up.

If you find any other articles estimating the fair value of the S&P500 or other indexes, please post them here.



https://seekingalpha.com/article/4524507-equity-risk-premium-a-profound-revelation-but-not-really