Tags: S&P 500 | stocks | selloff | economy

Even at Record Highs, S&P 500 Still Trading Below Fair Value

By    |   Tuesday, 23 Dec 2014 05:17 PM

Major stock market indexes gained more than 5 percent in less than a week on news that the Federal Reserve sees signs of an economic recovery.

Strong economic growth should lead to higher earnings for companies and increased earnings should lead to higher prices in the stock market. The question investors face is have prices gone up too much?

Based on 2015 earnings estimates, the S&P 500 is trading with a price-earnings (P/E) ratio of 15.8. A P/E ratio below 17 is usually considered low, indicating stock prices could rise another 7.6 percent before becoming expensive.

Dividends are low, but they contribute an additional 1.8 percent to the possible total return of the stock market. With dividends, stocks could provide a gain of 9.4 percent in 2015 without becoming overvalued.

This is good news for investors who often target annual returns of about 10 percent a year. In 2015, the stock market is likely to provide a gain of at least that much based on projected earnings and dividends.

This means there is no need to panic during quick selloffs like we saw in early December. A decline of 5 to 10 percent is normal in a bull market and should be expected. For now, these selloffs should be viewed as buying opportunities.

When the S&P 500 tops 2,225 it will be time to re-evaluate the long-term outlook of stocks.

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MichaelCarr
Major stock market indexes gained more than 5 percent in less than a week on news that the Federal Reserve sees signs of an economic recovery.
S&P 500, stocks, selloff, economy
230
2014-17-23
Tuesday, 23 Dec 2014 05:17 PM
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