The Other Alternative Futures For The S&P 500 In February 2014

by: Ironman at Political Calculations

Lots of analysts spend a lot of time trying to determine what the future expectations are for future earnings that investors have as they make investment decisions today as they set stock prices. For us, we already know what investors expect for what future earnings (or really, dividends) that they can reasonably expect to earn in each of the future quarters through the end of 2014, but the real challenge is determining how far in the future they're looking, because the expectations for just one of these future quarters will be the primary driver for stock prices.

To that end, we're going to re-do our previous "what-if" exercise from last week, where we only presented how stock prices might reasonably behave during the month of February if investors maintained their focus on 2013-Q2 in setting their expectations, to also show what a focus on either 2014-Q3 or 2014-Q4 would mean for the S&P 500.

Click to enlarge

Welcome to our world, where we're always working in one of several alternative futures ...

The chart above assumes no new noise events to cause stock prices to deviate from these basic trajectories, and also no significant changes in expected future dividends for each future quarter over the time frame shown on the chart. For the data for 2014-Q4, there is one difference from the version we posted on 30 January 2014, as we corrected the calculation for 28 February 2014 (it was a Microsoft Excel copy and paste thing - we should have dragged and dropped for that data point instead!)

As for how to interpret the chart - the shaded vertical bands are where we would expect stock prices to be given typical levels of noise in the stock market, which are centered on each of the alternative trajectories that are driven by the specific alternative future investors have primarily focused their attention in making their buying and selling decisions today. In the absence of large volumes of noise, you should be able to tell pretty quickly which future investors have primarily focused their attention.