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Modeling The Fair Value Of The S&P 500

Dec. 18, 2020 5:33 PM ETS&P GSCI Futures (SPGSCITR:IND)4 Comments
Vittorio Manente profile picture
Vittorio Manente


  • A methodology to model the value of the S&P 500 is presented.
  • The model relies on macroeconomic factors: gross domestic product, corporate bond yield relative to 10 year Treasury bond, money stock index and consumer price index.
  • The model accuracy (R-squared) exceeds 95%.
  • The model was used to provide the 2021 S&P 500 price outlook under three scenarios.

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Large and small investors are quite often faced with the question: Where is the equity market heading? Generally speaking nobody knows what will happen tomorrow or in a year from now. I am confident that any of the reader did not come across the idea of world lockdown prior this COVID pandemic.

What we know is that the market is influenced by factors like the gross domestic product, treasury rates, inflation and so on. For instance, it is given that when the gross domestic product grows, all other factors being equal, then the equity market goes up. The question then becomes, how much?

In this article, I am showing that the S&P 500 can be modeled as function of the main macroeconomic parameters of the USA economy. These factors are: gross domestic product (GDP), money stock index (M1), BAA corporate bond yield relative to 10 year Treasury bond (BAA-10Y) and consumer price index (CPI).

In Figure 1, the actual and modeled S&P 500 index is presented. The model uses monthly data tracing back to the 1960's. The model has an accuracy of 95.72%; R2. The 2 standard deviation of the error has been calculated to be 10.48%. The error is defined as the relative difference between actual and modeled value.

Figure 1: Actual and modeled S&P 500 index. Source: Created by the author.

In Figure 2, it is shown how these four macroeconomic variables are affecting the value of the S&P 500. The variables were varied one at the time ±20% from their reference value. The reference value was

This article was written by

Vittorio Manente profile picture
Vittorio Manente is a program manager and strategy analyst for the last 16 years within the automotive and Oil&Gas sectors. Vittorio became passionate about finance in summer 2011 when he saw opportunities to profit after a market meltdown. Not satisfied by the performances of financial products available for retail investors, he decided to create his own. In 2017 Vittorio launched NEXT-alpha, a quantitative macro strategy to deliver consistent returns independently on the market direction. NEXT-alpha invests in uncorrelated assets and uses a variety of statistical techniques to take investment decisions. In 2019 Vittorio started Alpha Growth Capital, with the mission of helping people to generate additional source of income while they deal with their daily duties. Vittorio enjoys writing articles that might span from simple topics such as personal finance to more advanced ones such as financial engineering modeling.

Analyst’s Disclosure: I am/we are long TQQQ, NDAQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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