How Much Lower will the S&P 500 Drop?

May 20, 2022 | Finconomics 101

With the S&P 500 down -18% for the YTD period  (Jan – May 2022), the question is how much lower will the market drop until it reaches fair market value? Maybe we are already at a bottom? While comparing the market’s price/earnings ratio (P/E) to historical averages is a good place to start, it is not a perfect method because of differences between interest rates and earnings growth prospects. Having said that, we can see that the median P/E since 1900 has been 16x vs. the current 18x level. Notably, the average P/E since 2000 (a low interest rate environment) has been much higher at 22x. In any case, we must wrestle with the key question: how will S&P 500 earnings perform over the next 12 months given huge unknowns around inflation, the supply chain and consumer strength. What if earnings declined -5% over the next 12 months to a 205 annual rate and the P/E declined to 16x (the historical average)? This would bring the S&P 500 to 3,280 (a further -16% drop from here). If earnings are flat and the P/E drops to only 17x, the S&P 500 index would find itself at 3,665 (-6.5% from here). 

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Disclaimer of Liability: Although the information in this post has been obtained from sources NBE Media LLC believes to be reliable, NBE does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. NBE Media LLC’s analyses and opinions are not a guarantee of the future performance of the economy nor any industry, company or security. NBE Media LLC disclaims all liability for any misstatements or omissions that occur in the publication of this post. In making this post available, no client, advisory, fiduciary or professional relationship is implied or established. While this post is intended to provide an relevant economic analysis, it cannot be used as a substitute for independent investigations and sound business judgment.
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