Even though the price of the S&P 500 Index has fallen from the 3,300 level just a few months ago to 2,472 at the time of writing, for a 25% decline since the outbreak of COVID-19 has gripped the global economy, I do not believe that investors can conclude that the S&P 500 is now “on sale.”
When someone buys a share in an S&P 500 Index fund, paying $24.72 (or 247.20, or even $2,472 depending on the scaling), they are buying an asset that consists of America’s largest publicly traded companies that earns $1.33 per share. In other words, the S&P 500 is trading at 18.5x the most recent twelve months of earnings.
That is still above the S&P 500’s historical valuation of 15x earnings. In other words, for investors to obtain the 10% annual returns that are often discussed as the historical returns of the stock market, the … Read the rest of this article!