To The Moon

Summary

• We look back at three different analyst consensus earnings estimates for the S&P 500 published in October of 2022 and compare them to the actual earnings reported.

• We then look at the earnings these same three estimates are predicting for 2023 earnings and the P/E ratios today's S&P 500 price would generate using them.

• We then look at how these P/E ratios compare to the ratios that were historically typical of four different kinds of markets to determine whether the S&P 500 is now well-valued.

• We provide a table showing what prices of VOO, VTI, and SPY would generate historically significant P/E ratios based on the current S&P 500 price using some conversion ratios we have found helpful.

S&P 500

$E-mini S&P 500 - main 2306(ESmain)$ Half a year has gone by since I reviewed analysts' predictions for the earnings of the S&P 500 (SP500) and the Price/Earnings ratio that we could derive from those estimates. A fan recently asked if I would update him on how the S&P 500's valuation looks now. That's what we'll do in this article.

But first let's review the valuation estimates we made back in October, at a time when the S&P 500 was nearing its most recent bottom. As our P/E estimates always depend on earnings forecasts provided by analysts, it would serve us well to check out how accurate the October 2022 analysts' forecasts of the S&P 500's earnings for 2022 turned out to be.

Three October 2022 P/E Estimates Portrayed the S&P 500 at a Level that Historically Has Made it a Good Buy

In my article published on October 4, 2022, when the market was nearing its nadir I pointed out that there were several different compilations of analyst consensus estimates and that the P/E ratios each earnings estimate would produce varied significantly.

Back on October 3, 2022 Fastgraphs came up with a P/E ratio for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) of 16.70. Fastgraphs generates its estimate of the earnings of SPY using the analysts' estimates for each of the individual holdings of SPY as reported by S&P Global.

Yardeni Research Inc. uses a different set of analysts' earnings estimates, I/B/E/S data reported by Refinitiv. Back in October that data assigned the S&P 500 a P/E ratio of 16.88. This is very close to Fastgraph's estimate at the time. Those estimates were based on a forecast that the S&P 500's earnings for 2022 would come in at around $224/share.

Yardeni Research also supplies its own estimate of S&P 500 earnings. In October of 2022, it was lower than that of the data providers we just discussed. Yardeni Research's estimate was that the year's earnings would come in at $215/share. Based on that estimate, last October, the P/E of the S&P 500 would have been 17.56.

All of these estimated P/E ratios were well within the range where, historically, the S&P 500 is a safe buy. However, in that October article I questioned how accurate the earnings estimates would turn out to be.

How Did The S&P 500's Year/End 2022 Earnings Compare to the October Analysts' Estimates?

The S&P 500's actual earnings for 2022 came in at $218.09/share. This was only 1.4% higher than Yardeni Research's Estimate.

The consensus analysts' estimates taken from S&P Global and I/B/E/S data were about 2.5% too high compared to the actual earnings reported.

This should reinforce your understanding of what a slippery metric P/E ratio is when we apply it forward. Given how much speculation goes into analysts' forecasts, it is only when the year is complete that we know the actual P/E of any stock, ETF, or index.

Keep this in mind when you see fund providers tell you what the forward P/E of their ETF is, since it is based on a forward earnings estimate that is not only speculative, but often not provided to customers.

What are the Current Estimates of the S&P 500's 2023 Earnings?

The analysts' estimates for SPY's earnings, computed by Fastgraphs, which is based on S&P Global data, currently stands at $21.44/share. Fastgraphs tells us that this would represent a decrease of 1% in SPY's earnings compared to last year. (SPY tracks the S&P 500, so closely it is safe to use it as a proxy, which is what Fastgraphs has told me they do now because of the extremely high price S&P Global charges for their S&P 500 data feed.)

Currently Yardeni Research reports that the I/B/E/S analysts' estimates predict that the S&P 500 will earn $220.09/share. This would represent earnings growth of .09% for the entire year.

Yardeni Research, as we mentioned before, offers its own prediction, different from that of these analyst consensus forecasts. As of May 15 2023, Yardeni Research predicts that the S&P 500's earnings for 2023 will come in at $225/share. This would represent earnings growth of 3.2%.

Here we see a significant spread in terms of optimism, from the negative S&P Global earnings forecast of -1% to the much more optimistic Yardeni Research estimate of 3.2%. Yardeni was the most accurate estimate last October, but there is no way of knowing if that will turn out to be the case this year because no one can know this far in advance how the market will behave over the rest of the year.

You will have to decide which estimate you want to use for determining the S&P 500's valuation and that of the ETFs that track it. Or you may ignore all of these estimate though if you do that there is no way to estimate its current valuation.

The P/E Ratios Derived from These Three S&P 500 Earnings Estimates

Using the share price of the S&P 500 which I captured at 10:52 AM on May 18, 2023, which was $4175.89 and the corresponding price of SPY which was $417.00, the three different current earnings estimates we have access to generate the following current P/E ratios.

S&P 500 Earnings Estimates

As you can see, there is a wider variation between the various estimates now than there was back in October of 2022. That is to be expected because it is still many months until the end of 2023. So all these estimates are far more speculative than the ones we saw in October of 2022 close to the end of the year.

How Do These P/Es Compare to The P/E Ratios that Prevailed in Previous Market Conditions?

In my research for a past article I studied the changing P/E ratio of the S&P 500 over periods scattered through several decades. From this I came up with an estimate of what P/E ratios were most characteristic of the index during four different very different kinds of markets going back to 2021.

Prevailing Historical P/E Ratios During 4 Different Kinds of Markets

P/E ratios characteristic of various kinds of markets

BOTTOM LINE: Current Valuation Estimates for 2023 Hover In The Range Between A Stagnant Market and a Healthy Market

Looking at these P/E ratios, we can see that all three of the current P/E ratios we calculated above, based on the three different analyst estimates we have access to, fall into the gap between the historical S&P 500 P/E Ratio characteristic of a stagnant period without a crash and that of a period when the market is seeing healthy corporate earnings growth.

Based on this historical data, if you believe that S&P 500 earnings are going to decline over the course of 2023, and possibly in the next year too, you would have to conclude that the S&P 500's current price is overvalued.

If you believe that the S&P 500's earnings are going to provide a modest amount of growth over the course of this year, as we see Yardeni Research does, a case could be made that the current price gives us a valuation that is not out of line with historical market data.

BONUS: Current Prices for the ETFs I follow that Correspond to The Characteristic Historical P/E Ratios

Using the methodology I have applied in several previous articles, I apply some ratios I extracted from historical price data to calculate the prices for SPY, the Vanguard S&P 500 ETF (NYSEARCA:VOO) and the Vanguard Total Stock Market ETF (VTI).

The following chart uses the current analyst consensus earnings reported by Fastgraphs for SPY and the current S&P 500 price to calculate what prices of these ETFs that would produce the P/E ratios characteristic of the four kinds of markets.

Prices of Popular ETFs that Generate Selected Historical P/E Ratios

Prices of Popular ETFs that Generate Selected Historical P/E Ratios

I have found that the prices my calculations provide are accurate to plus or minus $2 almost every time I check. The ratios I use to calculate the various factors you see here are as follows.

Conversion factor SPY price to S&P 500 price = .09949Conversion factor S&P 500 price to VOO price = .0916Conversion factor VOO price to VTI price= .546

I submit them to you making no claim that they will always work, but they have been very helpful to me since January of 2022 when I developed them.

Note that though many investors believe that VTI should behave differently from VOO, I have found that the huge role played in the top 500 stocks by market cap in VTI make its actual price possible to predict based on VOO's price most of the time.

Source: seeking alpha