What is the medium- to long-term return on the stock market?
STOCK MARKET RETURNS IN THE LOGIC OF A KNOWLEDGEABLE INVESTOR, DEPEND ON 2 THINGS: EARNINGS GROWTH OVER TIME AND DIVIDENDS
So, let's look at the current situation, and understand why a moment like this is particularly delicate, especially on the equity front...
Profit analysis
After Covid, which saw a substantial drop in earnings, the upward trend has resumed. Let's take a look at the estimated earnings per share (EPS) over the past year.
As you can see, we have gone from a value of $135 (earnings per share of the S&P 500 Index, red line) in the space of a year, to a value of $220 per share recently measured in March 2020.
Now, let's use this value, considering what can be an "average" Price/Earnings ratio for the same index (the average of the last 10 years is 19.10) and then let's multiply 220 * 19.10 = 4.202.
You have just found out what the value of the S&P 500 index should be "on average" with earnings revised accordingly.
Now, some clarifications... The market in the short term is irrational, so the index is unlikely to get to this exact value "because the maths says so". As far as we have seen recently, it could collapse to 3,000 points or return to the February highs above 4,800, no one can know.
But it is much more correct, and extremely useful, to use this number obtained to understand WHAT THE CURRENT VALUATIONS ARE IN COMPARISON WITH A VALUATION JUDGED "CORRECT".
So if we look at the current valuations (see image below), we see that the index now stands at around 4480 points after the recent decline.
If I were to base myself on this figure alone, I would almost say "we are about 10% overpriced", and consequently expect a further decline to bring prices into line with what is technically termed "regression towards the mean".
Now, as I said before, this does not happen because the markets are irrational in the short term, but at the same time, the question I ask myself is: what does the real economy (GDP, unemployment, consumption, confidence, inflation) tell me about the current situation?
This is certainly not a good thing if we look at the outlook (high inflation, restrictive central banks, labour market at its peak). The moment is delicate, and we can therefore understand why, at this time, accumulation plans, fractioned entries with very meticulous selections and more accurate liquidity management are to be preferred.
So we have figured out in this article how to use some useful hints to make our own calculations and evaluate a market according to correct logic.
S&P 500 ETFs
With regard to the world's most important index, let's see which are some products that can allow us to gradually take a position on this asset class. In particular, there are a number of ETFs (Exchange Traded Funds), which are nothing more than "passive" replication instruments for exposure to major indices such as the US index at very limited costs.
In particular, we have several, each with specific characteristics, namely:
- Size (assets under management)
- Type of replication (physical, synthetic)
- Income distribution (accumulation or ex-dividend)
- Listing exchange
- Exchange rate hedged or not
- Costs (look at the TER)
Among the main ones, we find the following:
- iShares Core S&P 500 UCITS ETF USD (Acc) CSPX
- Vanguard S&P 500 UCITS Acc VUAA
- Invesco S&P 500 UCITS ETF SPXS
Until next time!
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"This article has been written for informational purposes only; it does not constitute a solicitation, offer, advice or recommendation to invest as such and is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from several points of view and is highly risky and therefore, any investment decision and the related risk remain the responsibility of the investor."