S&P 500 Valuation Kaleidoscope: GS Says Fair, Others Say Too High

Goldman Sachs analysts David J Kostin, Stuart Kaiser, Amanda Sneider, Ben Snider, Rima Reddy and Aaron Woodside looked at different valuation methods to address the question of whether or not the S&P 500 (INDEXSP:.INX) is fairly valued in their recent study, “US Weekly Kickstart” of October 25, 2013.

Goldman’s own value for the S&P 500

The S&P 500 (INDEXSP:.INX) is now trading at 1762, above Goldman’s year-end projected target of 1750, which the firm considers a fair value. They also expect the index to trade more or less around these levels until the end of 2013. Projection for the 2014 close is 1900, and 2015 comes in at 2100.

Approaches that support Goldman’s thesis of ~1750

  • Goldman Sachs Group Inc (NYSE:GS) says that the current ROE for the index is 15.5% and that usually correlates with a Price/Book Value ratio of 2.5X. Currently the S&P500 is 2.6X book value, which is the 10-year average.
  • The firm observes that since 1982, the P/E multiple of the index has expanded nine times and during these cycles the S&P500 varied in the range of minimum 10x and maximum 15x (trough to peak). Interestingly, the current cycle had its trough in September 2011 at 10.6X and is now at 15.5X of Goldman’s EPS estimates for 2014.

Shiller’s CAPE ratio values the S&P 500 much, much lower…

Valuing the S&P 500 (INDEXSP:.INX) by this approach, which utilizes the past ten years’ earnings, the S&P 500 is now at 24.5x, while its 80-year average is 17.7x. The S&P 500 value corresponding to the latter is only 1450. By this standard the market is heavily overvalued.

… And so does a macro-economic model

A macro-economic model that utilizes output gap and inflation data places the fair value of the index at 1525 (13.1x forward earnings), 13% below the current level.

Below is a table that shows how the various approaches (except the outliers) converge on a valuation that is similar to the S&P500 today.

S&P 500 valuation table

And here’s the CAPE Ratio chart that values the S&P 500 (INDEXSP:.INX) at 1450:


It might be worthwhile to point out here that the CAPE Ratio was ruling at high levels prior to the great financial crisis in 2008. says it might have been an early indicator of the impending collapse. “The logic is that the S&P 500 (INDEXSP:.INX) was trading too high and not justified by earnings per share figures as measured by the previous ten years adjusted for inflation (per the CPI index).”