Estimates for the S&P 500 Index, the Fear and Inflation Risk Premia

12/30/2011

Dr. Christophe Faugere, UAlbany School of Business

cfaugere@uamail.albany.edu

The following daily estimates are produced using formulas developed within the framework of Required Yield Theory^TM. The core argument of Required Yield Theory (RYT) is that investors price assets to earn a positive real return after-tax. We show that this return is equal to long-term real GDP/capita growth at about 2% in the U.S. Any feedback to help us provide a great service is welcome.

Inputs

Value

HIGHLIGHTS

Marginal tax rate (State+Federal) on dividend income

18.75%

Next day RYT based SP500 Forecast

Marginal tax rate (State+Federal) on capital gains

19.49%

RYT estimated SP500 Price Close Today

1245.73

Marginal tax rate (Federal) on interest income

28.07%

Actual SP500 Price Close Today

1257.60

Expected Inflation ten-year CPI

2.40%

% overvalued (+)/undervalued (-)

0.95%

Long-term real GDP per capita growth i.e Required Yield

2.21%

Estimated SP500 forward earnings yield

8.57%

Nominal yield on Treasury bond with 1-year maturity

0.12%

Estimated forward SP500 P/E Ratio

11.67

Nominal yield on Treasury bond with 10-year maturity

1.89%

After-tax Fear Premium

2.38%

Nominal yield on Treasury bond with 30-year maturity

2.89%

After-tax estimated Inflation Risk Premium (20yr)

0.05%

Expected next year growth rate of book value per share (SP500)

7.18%

Confidence Index = (ATDiscount Rate-ATFear Premium)/ATDiscount Rate

65.91%

Dividend payout ratio (SP500)

27.03%

Estimated 12-months forward operating earnings (SP500)

106.77

Click for historical DAILY estimates of EPS and S&P 500 (DISABLED)

Sources for inputs and references:

Marginal Tax Rates: TAXSIM Model:

http://www.nber.org/~taxsim/

Nominal Treasury yields U.S. Treasury daily rates:

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Actual and estimated SP earnings and dividends:

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,0,5,0,0,0,0,0.html

Articles:

Required Yield Paper

Equity Fear Premium Paper

Document Explaining the Data Behind our Estimates

News Corner: IMPORTANT as of 12/31/11, I am suspending my web estimates. Contact my twitter page @SP500Forecast to follow daily estimates.

Check out my new survey of literature and RYT

NOTE: The graph below is not the result of retrofitting the data using a "regression"-type technique. It is the result of our RYT formula using fundamentals.

Copyright Dr. Chris Faugere. None of the information contained in these reports and links shall be misconstrued as investment advice and Dr. Faugere and his employer shall not be held liable for losses resulting from use of mis-use of displayed information. RYT estimates of the SP500 are concurrent estimates. Forward Earnings are one-year ahead estimates. Inflation risk premium is an after-(interest) tax 20-year horizon estimate. The Equity Fear Premium is an after-tax premium to be added to the discount rate for valuing the SP 500. Details about construction of these estimates can be found in: 1) C. Faugère and J. Van Erlach, 2009, “A Required Yield Theory of Stock Market Valuation and Treasury Yield Determination,” Financial Markets, Institutions and Instruments, 18 (1), 27-88. 2) C. Faugère, 2010, “The Equity Fear Premium and Daily Comovements of the S&P 500 E/P ratio and Treasury yields before and during the 2007 Financial Crisis,” UAlbany Working Paper. Please cite these sources when using the data.