Hopes & dreams

As Yogi Berra said “it’s tough to make predictions, specially about the future”. Perversely, market valuations are based, for the most part, on expectations, which are subject to a great deal of uncertainty on multiple variables. Following that logic and in an efffort to find a valuation for the S&P500 that makes sense during this time, the chart below brings some light to it, although not very encouraging. It decomposes the value of the index in three items: Book Value + NPV of index EPS + “Hopes & Dreams”. Being the last component obviously the most volatile, if it were to adjust to zero optimism, like it did on 2008, the #sp500 will have a valuation of roughly 2000 points, arguably the worst case scenario. The important point is that there’s an air pocket that needs to be filled with something: productivity, QE or else.

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Source: Arbor research.