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 1.1% to 5,150. Earnings per share for the index fell by 30c. At the current price, the S&P 500 offers a 9.0% annual expected return. Those are some of the highest returns on offer in over a decade.

𝑉𝑎𝑙𝑢𝑎𝑏𝑙’s discounted cash flow model suggests the S&P 500 is worth $4,735 per share. The companies in the index earned $1,853bn in the past year. They paid out $573bn in dividends, bought back $861bn worth of shares, and issued $71bn of equity. Net payouts to shareholders were $1,362bn, 74% of earnings, or $162.30 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 8.2% overvalued.