S&P 500 Is Fully Valued

The Risk/Reward of the entire S&P 500 gets our Neutral Rat­ing. Our recently pub­lished Index Bench­mark report on the S&P 500 offers unique insights into the under­ly­ing prof­itabil­ity and val­u­a­tion of all the com­pa­nies com­prised by this index. It also offers bench­marks for (1) investors con­sid­er­ing buy­ing ETFs or Index Funds based on the S&P 500 and for (2) com­par­ing indi­vid­ual stocks to the S&P 500.

Our analy­sis of the index is based on the market-weighted aggre­ga­tion of data from our com­pany mod­els for the 481 com­pa­nies we cover in the S&P 500. Appen­dix 1 in our report lists all com­pa­nies included. We offer aggre­ga­tion reports on the Risk/Reward Rat­ings for any ETF, mutual fund or cus­tom port­fo­lio. Note that our com­pany mod­els incor­po­rate key data from Finan­cial Foot­notes and the MD&A to reverse account­ing dis­tor­tion and pro­vide investors with the true eco­nomic earn­ings of busi­nesses. Because we can­not repli­cate the hold­ings of pro­pri­etary invest­ment vehi­cles, we pro­vide bench­marks for their Risk/Reward based on the prof­itabil­ity and val­u­a­tion of a rea­son­able proxy for the group of com­pa­nies they hold.

Below is an overview of the five fac­tors that drive our Over­all Risk/Reward Rat­ing of Dan­ger­ous for this index.

  1. Qual­ity of Earnings
    • Eco­nomic ver­sus reported earn­ings – Attractive/Positive Economic Earnings
    • Quin­tile Rank­ing for return on invested cap­i­tal (ROIC) – Very Attractive/1st (best) Quintile
  2. Val­u­a­tion
    • Free Cash Flow Yield – Attractive at 3.3%
    • Price-to-economic book value – Attrac­tive at 1.3
    • Growth Appre­ci­a­tion Period – Dan­ger­ous at 20 years

Notably, Apple (AAPL) and Microsoft’s (MSFT) large market caps and extraordinarily high ROICs have a major impact on the market-weighted ROIC of the S&P 500. AAPL has an ROIC of 190.2% and is 2.6% of the S&P 500’s market value, representing 5% of the S&P 500’s ROIC. The next largest impact is from MSFT with an ROIC of 61.6% and as 2.1% of the S&P 500, it makes up 1.3% of the S&P 500’s ROIC. Without AAPL and MSFT, the S&P 500’s market-weighted ROIC would fall from 17.4% to 11.1%. Click here for our report on MSFT and here for our report on AAPL.

Def­i­n­i­tions of the five fac­tors that drive our Risk Reward Rat­ings are below:

  1. Qual­ity of Earnings
  2. Val­u­a­tion
    • Free Cash Flow Yield –  mea­sures the market-weighted aver­age of the free cash flow divided by enter­prise value for the com­pa­nies we cover in each index
    • Price-to-economic book value –  mea­sures the market-weighted aver­age of stock price divided by the eco­nomic book value of the com­pa­nies we cover in each index
    • Growth Appre­ci­a­tion Period – mea­sures the market-weighted aver­age of the market-implied growth appre­ci­a­tion period for the com­pa­nies we cover in each index

Note that the indi­vid­ual com­pany mod­els used to per­form this analy­sis incor­po­rate key data from Finan­cial Foot­notes and the MD&A to reverse account­ing dis­tor­tion and pro­vide investors with the true eco­nomic earn­ings of businesses.

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