• Date of last earnings estimate: 2/27/15
  
• S&P500:  2104.50
  
• Trailing 12-month GAAP (Generally Accepted Accounting Principles) earnings = $102.77
• PE Ratio = 20.48 using GAAP earnings of $102.77 and S&P500 at 2104.50.
• Trailing 12-month Operating earnings= $112.92
• PE Ratio = 18.64 using $112.92 operating earnings and S&P500 at 2104.50.
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Summary of Data (click to view full size)

The markets are smarter than simple models as it looks at alternative investments and says the market is worth exactly what it is today.   Multiply the 2016 operating earnings estimate of $136.52 by today’s 2014 operating PE of 18.0 and we get a target of $2,457, a 16% gain for about 8% a year.  Add in 2% dividends and we get an expected return of roughly 10% a year for the next two years.  The market will not support the current PE when the Fed raises rates, but the higher rates should come with higher economic growth and corporate profits so we could still get 10% a year going forward if the Fed raises rates that match future earnings growth, a very tough task. 

 

Jeremy Siegel, author of “Stock for the Long Run” on my "Recommended Reading List" says that Robert Shiller’s CAPE model below is flawed due to exceptionally low earnings during the 2008/9 recession. I think it makes sense just as using models for “average bond returns” are flawed due to an exceptionally long bull market in bonds.