No. of Recommendations: 22
Peak reported earnings based valuation:
Peak reported trailing twelve month earnings for the S&P 500 index were 197.87. The index achieved this during 2021 Q4 quarterend. Using the latest Aug 2023 CPI of 307.026, this translates to real earnings of 222.86. Let's round it up to 225.
Granted current earnings run rate is a lot lower at around 185, but markets are forward looking. One could take the perspective that the index has proven it can earn 225. It's only a matter of time that level is reached again and then surpassed.
Using today's (9/26/23) closing price of 4273, that's a multiple of 19. Not a screaming bargain, but not absurdly cheap either.
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Sales and profit margin based evaluation:
I am firmly in Buffett's camp that making macro economic predictions regarding interest rates, recessions, etc. is a fool's errand. The only thing we can reliably say is that index sales have grown at 1.5% real over the long term. This makes sense because sales will track GDP which has also grown at the same rate over the last century.
So let's take 2022 yearend sales of 1816 and grow them at 1.5% for 10 years. That gives 2,108 real sales at 2032 yearend. Profit margins hit a peak of 12.63% in 2021, but let's assume they come down to around 9% a decade from now. That gives you real earnings of 2108 * 0.09 = 190.
At an 18 multiple, that puts the index real price at 190 * 18 = 3420 at 2032 yearend. Starting from today's price of 4273, that's a CAGR of -2.20%. But we will get dividends of 2% or so along the way. Adding that gives a real return of 0% for the next 10 years. At least you are keep up with inflation!
Your nominal return will of course be higher depending on what inflation does. Possibly 3 - 4% as a base case.
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My conclusion is that continuing to dollar cost average, for those that have the index as a foundation of their portfolio, is not a bad idea. This is especially true for retirement accounts like 401k where individual stocks may not be an option. Given the restrictive policies currently in place, the price most likely won't run away from us. It may just wander around with periods of low prices likely in the future. Blindly dollar cost averaging should result in a low single digit real return for holding periods of at least a decade or longer.
