The following chart shows us the normal value range of the S&P 500 Index, indicating where the S&P 500 would have to be in order to have an overvalued P/E of 20 (red line), a fairly valued P/E of 15 (blue line), or an undervalued P/E of 10 (green line). Annotations on the right side of the chart show where the range is projected to be based upon earnings estimates for the next four quarters, through 2022 Q3.
Historically, price has usually remained below the top of the normal value range (red line); however, since about 1998, it has not been uncommon for price to exceed normal overvalue levels, sometimes by a lot. The market has been mostly overvalued since 1992, and it has not been undervalued since 1984. We could say that this is the "new normal," except that it isn't normal by GAAP (Generally Accepted Accounting Principles) standards.
We use GAAP earnings as the basis for our analysis. The table below shows earnings projections through September 2022. Keep in mind that the P/E estimates are calculated based upon the S&P 500 close as of January 3, 2022. They will change daily depending on where the market goes from here.
The following table shows where the colored bands will be, based upon earnings estimates through 2022 Q3. We can also see what the estimates were last quarter.
This DecisionPoint chart keeps track of S&P 500 fundamentals, P/E and yield, and it is updated daily -- not that you need to watch it that closely, but it is up-to-date when you need it.
CONCLUSION: The market continues to be grossly overvalued, and this will continue unless: (1) earnings improve substantially, (2) price declines into the normal zone, or (3) a combination of the two.
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