The S&P probably deserves a multiple of 20 given the Fed is going to be holding short rates...

The S&P probably deserves a multiple of 20 given the Fed is going to be holding short rates at 0% and the 10-year around 2% for many more years, writes David Kotok. Given this and a conservative earnings guess of $90, fair value for the S&P 500 would be 1800 today. As for the end of the decade? If the Fed's going to keep with this, his previous guess of 2K is far too conservative.

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Comments (6)
  • GaltMachine
    , contributor
    Comments (2068) | Send Message
    FED adds 3rd mandate:


    "PE Multiple Expansion".


    Ben Bernanke says that the Hampton real estate market is critical to the long-term health of our economy: "The prospect of hedge fund managers being forced to rent housing would be a devastating blow to the psyche of our country. The FED will do everything in its power to prevent this from occurring."


    Senate Finance & Banking Committee Testimony, Sept 13th, 2012
    24 Sep 2012, 11:47 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
    Aww poor hedge fund managers lol.
    24 Sep 2012, 11:52 AM Reply Like
  • Financial Insights
    , contributor
    Comments (928) | Send Message
    All things being equal he is right, but equity prices are determined by more than just one factor.
    24 Sep 2012, 11:49 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1911) | Send Message
    The higher we go, the harder the inevitable crash.
    24 Sep 2012, 11:55 AM Reply Like
  • whidbey
    , contributor
    Comments (3539) | Send Message
    The earnings are high given the trends, and the new taxes to be laid on in the out years.
    24 Sep 2012, 11:56 AM Reply Like
  • dlevine007
    , contributor
    Comments (238) | Send Message
    I agree with him. The S+P can go a lot higher as long as the fed keeps doing this. What is the alternative? The S+P was at 27x earnings in the late 1990s and rates were a lot higher back then, so 20 is just a number he pulled out of his rear end to sound conservative and believable. Don't forget, bonds are priced for perfection (equivalent to over 50x earnings on the 10 yr treasury), and there is a lot of downside risk with that. So if you can pay 50x earnings for overpriced treasuries, then why can't you pay 50x earnings for overpriced stocks (during the last bubble equities had a lower earnings yield than bonds because the market DECIDED that stocks were less risky. So the moral of the story is, don't fight the fed... at least for now.
    24 Sep 2012, 12:06 PM Reply Like
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