Lets Get PhysicalS&P 500 2012 Earnings Shaping up As 99% of earnings are in the books as of December 8th, todays

update continues to reflect the S&P 500 trading at a premium around 18% based on all indicators of average earnings. While futures reflect 1250ish as of this writing, the S&P 500 bolsters a 23% premium over fair value based on a nominal and CPI adjusted fair value metrics. The following table illustrates Fair Market Value for the S&P 500 using timeframes of 5, 10, 15, 20, and 30 year average earnings (full report available from the following location: (http://www.scribd.com/doc/75450531/CFMV-Q3-11-Final)

Based on both a nominal and CPI-adjusted basis, the averages of all time periods for both of these calculations nearly match at 964 pretty crazy. Remember that these valuations are tied to Q3-11 earnings and match the average of daily index closes for September 11. This quarterly earnings study uses both nominal and CPI-adjusted data (popularized by Professor Robert Shiller). A primer on the study is available here (http://www.businessinsider.com/will-the-real-sp-500-fair-value-please-stand-up-2010-11). As one can determine from the table, regardless of time horizon for investors, the S&P 500 remains overvalued.

When viewing the chart below for the combined Fair Market Value readers can clearly see that the S&P 500 will ALWAYS return to a fair value (and can remain undervalued for a period of time):

Readers have asked questions concerning how the S&P will return to fair value. The answer can be met by two methods. The first is easy, the S&P 500 Index drops below the calculated fair value (using whichever time horizon or method you prefer). The second is not so easy, because the earnings must accelerate and remain high for a prolonged period of time (such as 5 years) before the metric averages those numbers into the equation. We all remember in 5 years what has happened, 12 month trailing earnings went from 80s in 2007 to 7.00 in late 08 (when financials threw the baby out with the bathwater). The chart below reprises a former post concerning how skewed or out of the norm earnings have been over the past decade. The first chart below shows the regression lines for every earnings average listed above in the table with the S&P 500 Index in purple through 1995. The only real item to view is the angle of the regression lines. The magic behind 1995 is that in 1996, Greenspan issued his irrational exuberance speech.

The next chart adds the last 15 years of data and notice the angle of the regression lines slope much higher. This simply shows that the high rate of earnings impacted all the averages.

Everyone has the option to decide whether easy money, company growth, or some other parameter helped the rapid growth in earnings that defied the other 125 years of data. Maybe its different this time!