Stock prices fell slightly over the last two weeks. The S&P 500 index of big American companies dropped 1.2% to 4,689. But corporate earnings rose. Earnings per share for the index climbed $1.90 to $212.20. Yet the market is a little overvalued. At the current price, it offers an 8.8% expected return, some of the highest expected returns in over a decade.
Valuabl’s discounted cash flow model suggests the S&P 500 is worth $4,456 per share. The companies in the index earned $1.8trn in the past year. They paid out $550bn in dividends, bought back $843bn worth of shares, and issued $72bn of equity. Net payouts to shareholders were $1.3trn or $157.67 per share. This model used analysts’ consensus estimates for each company in the index to forecast future earnings per share. It also used a stable payout ratio based on the index’s average return on equity. According to this model, the market is 5% overvalued.