Stock prices rose last fortnight. The S&P 500 index of big American companies climbed 3% to 4,906 as corporate earnings rose. Earnings per share for the index rose $2.60 to $214.20. At the current price, it offers an 8.7% expected return, still some of the highest returns on offer in over a decade.
Valuabl’s discounted cash flow model suggests the S&P 500 is worth $4,669 per share. The companies in the index earned $1.8trn in the past year. They paid out $490bn in dividends, bought back $763bn worth of shares, and issued $65bn of equity. Net payouts to shareholders were $1.2trn or $141.52 per share. This model used analysts’ consensus estimates for each company in the index to forecast future earnings per share. It also used a stable payout ratio based on the index’s average return on equity. According to this model, the market is 5% overvalued—hardly a meaningful gap.