Cost of capital

Analysis of the ever-changing price of money

Stock prices fell slightly over the last two weeks. The S&P 500 index of big American companies dropped 0.2% to 4,549. But corporate earnings rose. Earnings per share for the index climbed 30 cents to $210.30. But the market isn’t undervalued yet. It’s trading at fair value. At the current price, it offers a 9.3% expected return, some of the highest returns on offer in over a decade.

Valuabl’s discounted cash flow model suggests the S&P 500 is worth $4,596 per share. The companies in the index earned $1.7trn in the past year. They paid out $536bn in dividends, bought back $845bn worth of shares, and issued $67bn of equity. Net payouts to shareholders were $1.3trn or $156.83 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 1% undervalued.