Monday, June 11, 2007

S&P 500 Target Estimate based on Ten Year Bond Yield

I recently read an interesting article by Frederic Ruffy of optionetics.com . One of the interesting parts of the article is a way to estimate the S&P 500 based on the yield of the ten year bond. Full Article Here

Currently, the Ten Year Yield (based on $TNX ) is approximately 5.137%. On an S&P 500 Earnings basis as Reported (estimates top down) as of 6/4/2007:

2006 Estimate: 81.51
2007 Estimates: 88.74
2008 Estimates: 96.40

With the formula:
S&P 500 Estimate = [1/(Ten Year Yield)] * (S&P 500 Earnings)

2006 S&P Target = [1/(.05137)] * 81.51 = 1586.7
2007 S&P Target = [1/(.05137)] * 88.74 = 1727.5
2008 S&P Target = [1/(.05137)] * 96.40 = 1876.6

With the current S&P 1509.12, is the 2006 S&P 500 5% undervalued?

And if we look at the 2007 estimate, the S&P 500 is 14.4% undervalued, and based on 2008 estimates, the S&P 500 is 24% undervalued.

Are these target prices reasonable?

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