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David Rosenberg: Median Fair-Value for the S&P is 1120

by Brett on December 20, 2010

Not bad – Rosenberg had the S&P fair value pegged much lower last time (in the range of 650 to be precise).

From today’s Breakfast With Dave:

S&P 500: No surprise here, the U.S. market continues to be overvalued.  According to our proprietary models, the median fair-value for the S&P 500 is 1,120 (with a range of 1,000 to 1,200) suggesting the market is overvalued by over 10%.  The fair-value line has actually been creeping upwards as earnings/revisions have recently improved.

Another metric we watch is the Shiller P/E ratio (uses cyclically-adjusted earnings), which moved up again to 21.9x (the highest since June 2006). Using this metric, the market is overvalued by 30%.

My big problem with using fair value estimates to trade is that they are usually trailing indicators – like earnings.  Last July, fair value had the S&P way lower than today – then stock prices rally, earnings follow, and voila – a much higher value!

If stock prices turn down from here, earnings would then follow – as would fair value.  So it’s tough to use this metric alone as a proxy for trading.

(See: Do Earnings Really Drive Stock Prices? A Look at the Data)

Still, interesting to see Rosenberg’s fair value estimate so high – I’d have thought he’d have things a bit lower, given his general level of bearishness.


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