Estimate the aggregate market for the S&P 500 index and either the Japanese Nikkei index or the German DAX index
harshwardhans
AggregateMarket.pptxThe Aggregate Stock Market
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Earnings Multiplier Approach
Forecast corporate profits for the coming period for an index such as the S&P 500.
Derive an estimate for the aggregate P/E ratio using long-term interest rates
Based on the relationship between the ‘earnings yield’ or E/P ratio for the S&P 500 and the yield on 10 year Treasuries
Product of the two forecasts is the estimate of the end-of-period level of the market
The text states that this is the most popular approach to aggregate market forecasting
Aggregate corporate profit forecasts are available from Standard & Poor’s, among others
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Figure 13.8 Earnings Yield of the S&P 500 Versus 10-year Treasury Bond Yield
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Earnings Multiplier Approach
2009 Data: Starting S&P500 level = 900
Treasury yield = 3.2%
Implied Earnings Yield = 2.5% + 3.2% = 5.7%
If E/P = 5.7% then P/E = 1 / 0.057 = 17.54
If forecast EPS = $55 what is the expected forecast for the S&P500 one year later and the % gain or loss?
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Table 13.4 S&P 500 Index Forecasts
An analyst should not rely on a point estimate. Table 13.4 includes a simple scenario analysis.
5
2.5%
spread
Treasury
yr
10
–
P500
&
S
yield
Earnings
Expected
=
7.2%
900
900
965
turn
ExpectedRe
965
55
17.54
P500
&
S
1
=
-
=
=
´
=
