S&P 500 earnings for 2018 Q3 have been finalized. The following chart shows us the normal value range of the S&P 500 Index. It shows us where the S&P 500 would have to be in order to have an overvalued P/E of 20 (red line); fairly valued P/E of 15 (blue line), or an undervalued P/E of 10 (green line). There are three hash marks on the right side of the chart to show where the range markers are projected be at the end of 2019 Q3. Last year price was well above the traditional value range; however, the recent price decline has lowered the P/E to 19, and the market is back within the normal P/E range of 10 to 20, albeit still overvalued. If earnings estimates hold and price doesn't change significantly, the market could be close to fair value by year end.
Historically, price has usually stayed below the top of the value range (red line); however, since about 1998 it is not uncommon for price to exceed normal overvalue levels. The market hasn't been undervalued since 1984.
The table below shows how earnings are expected to improve going forward, but the drop in P/E shown is only possible if price doesn't rise significantly. In the best case shown (2019 Q3), the market will be close to fair value, but this depends upon price being about the same level as it is now.
The following table shows where the colored bands will be using forward earnings.
CONCLUSION: The S&P 500 is back in the normal value range, but is still overvalued. Historically, overvalued conditions leave the market vulnerable for a large correction or bear market, and that seems to be what we are currently experiencing. These earnings charts are intended to provide an historical context for current earnings, and to demonstrate that overvaluation is not your friend.
Technical Analysis is a windsock, not a crystal ball.
Happy Charting!
- Carl
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Price Momentum Oscillator (PMO)
Swenlin Trading Oscillators (STO-B and STO-V)
