Cost of capital

Analysis of the ever-changing price of money

Stock prices rose last fortnight. The S&P 500 index of big American companies climbed 1.9% to 5,001 as corporate earnings rose. Earnings per share for the index rose 20 cents to $214.40. It offers an 8.9% expected return at the current price, some of the highest returns in over a decade.

Valuabl’s discounted cash flow model suggests the S&P 500 is worth $4,598 per share. The companies in the index earned $1,800bn in the past year. They paid out $423bn in dividends, bought back $743bn worth of shares, and issued $51bn of equity. Net payouts to shareholders were $1,115bn, 62% of earnings, or $132.90 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 9.4% overvalued. This is the broadest price-value gap since July last year before the market corrected.