Musing About S&P 500 Valuations

Seeking greener pastures

November 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The valuation of the S&P 500 depends on portfolio construction
  • Analyst EPS projections are likely overly optimistic
  • PEG ratios of other stock markets are more attractive


Striking a bargain seems to bring joy to all people, regardless of their location and their beliefs. It is almost as if it was genetically coded into us to feel good about having acquired something below its intrinsic value. Accordingly, we become angry when overpaying or getting ripped off. 

In some markets, the range of fair value of goods is narrow, eg paying $10 for a small bottle of spring water would seem expensive in almost all situations to most people. In other markets, fair value is a much more difficult concept. For example, is the S&P 500 cheap or expensive?

We could try to forecast the earnings of all the constituents of the S&P 500, assign terminal values, and discount these cash flows back to the present to derive a fair value. However, this requires multiple assumptions and these will vary from investor to investor. Fair value is very much in the eye of the beholder.

However, we can still try to create a high-level perspective by analyzing some of these major assumptions, and investigate if these are sensible, or not. 

In this research note, we will lightly muse about the current valuation of the S&P 500.


There are many ways to value the stock market like market capitalization-to-GDP, price-to-sales, Shiller price-to-earnings, and other ratios. We are going to focus on the simple price-to-earnings (“P/E”). However, this is more complicated than perhaps assumed. Should we take the current or forward P/E ratio? If forward, how far out do we want to go?  

As usual in investing, we need to make assumptions. Given that the stock market is forward and not backward-looking, we should take expected rather than past earnings. Using Wall Street consensus analyst forecasts for earnings, we observe that the P/E ratios for the S&P 500 are expected to decrease from current levels in the coming years. 

However, there is a significant difference between calculating P/E