SPX 2019 year end targets

US SPX 500OANDA

Description

⋅ Jan 20, 2019 4:59 PM

Which SPX target will you bank on for 2019? Comment below!
Each of these year end scenarios are based on a DCF valuation model:

A) 2700 fair value, 170 EPS 2019 estimate, 15.88 PE (20 year average forward PE)
4% EPS growth for next 5 years, shrinking to 2% after

B) 2500 fair value, 170 EPS 2019 estimate, 14.7 PE
2% perpetual EPS growth, 9% discount rate

C) 2250 fair value, 170 EPS 2019 estimate, 13.23 PE
0% EPS growth for 5 years, 2% EPS growth after, 9% discount rate

D) 1888 fair value, 170 EPS 2019 estimate, 11 PE
0% EPS perpetual growth, 9% discount rate

Comments

UnknownUnicorn615804

⋅ Jan 20, 2019 8:03 PM

I'm banking on sideways chop for 2019, so answer B. Where are you getting 9% as the discount rate from?

dime

⋅ Jan 21, 2019 3:34 AM

Great question, I've found 9% seems to be often used for DCF 'fair value' models.

DCF analysis requires a discount rate that accounts for the time value of money (risk-free rate) plus a return on the risk investors are taking.
A fair discount rate could then follow the 30 year treasury yield of 3% as the current 'risk free rate, and 6% as the extra 'risk premium' on equities.
Alternatively, the 20 year average forward PE of 15.88 when inverted is an earnings yield of 6.3% which when added to the 10 year Treasury 'risk free rate' of 2.78 is approximately 9%.

Additionally the long run inflation-adjusted average annualized return on the S&P500 is approx 9%. A reasonable expected rate of return.