Stock prices rose last fortnight. The S&P 500 index of big American companies climbed 0.8% to 5,070 as corporate earnings rose. Earnings per share for the index rose to $221.10. At the current price, it offers an 8.9% annual expected return, some of the highest returns in over a decade.
ππππ’πππβsΒ discounted cash flow model suggests the S&P 500 is worth $4,694 per share. The companies in the index earned $1,856bn in the past year. They paid out $541bn in dividends, bought back $841bn worth of shares, and issued $65bn of equity. Net payouts to shareholders were $1,317bn, 71% of earnings, or $156.90 per share.
This model used analystsβ consensus estimates for each company in the index to forecast future earnings per share. It also used a stable payout ratio based on the indexβs average return on equity. According to this model, the market is 8.6% overvalued. This is about the broadest price-value gap since July last year before the market corrected.