Is the S&P500 Overvalued? Ask FastGraphs
Is the S&P 500 overvalued? My X feed is full of pundits referring to the Buffett indicator and a plethora of other indicators to suggest that a crash is imminent. Here's one from Barchart:
First of all, I've lost a lot more money listening to crash predictions than I have made money. Timing the market is a strategy for genius traders and people that don't want to make money. Warren Buffett himself has called market timing "impossible and stupid". There is an adage that goes, "You can time the market and you can call the direction, but you can't do both at the same time."
That said, I want to share something with you. Below is an image of the FastGraph chart for the $SPY, representing the S&P 500:
I've been a subscriber to FastGraphs for over 5 years. It is one of my go-to tools for conducting research on equities. Equities fall under #6 Equity Asset Class of income producing assets. Equities, and options on equities, account for approximately 90% of my passive income portfolio currently.
The FastGraph chart shows that the S&P500 is trading at an adjusted operating earnings yield of 4.08%. How is this significant? Let me explain.
I like the adjusted operating earnings calculated by FastGraphs. It is a blend of trailing and forecasted earnings, according to the financial analysts referenced by FastGraphs. The green shaded area on the chart represents the earnings of the equity, in this case of $SPY. The black price line shows the equity's price history while the black straight line shows where it's current earnings valuation would be in the past and the future. The blue line represents the equity's mean valuation over this time period and the orange line represents the theoretical "fair value estimate" at each given yearly interval.
There is no other tool that I have found to more quickly and thoroughly provide a detailed and fast valuation picture than FastGraphs. They really are FAST. And that is important to me. Time is money, and I am busy with family and obligations. I need ways to do research and get it done in little time.
This $SPY chart from FastGraphs shows that the S&P500 is valued at a yield or price multiple that is uncommonly high since 2005. Relative to its mean, the S&P500 is trading at a much higher valuation. According to the analyst earning estimates, $SPY would be priced at $540 per share by the end of 2025 at its mean valuation multiple, far below its current $647 per share price.
The tool gets even more valuable! Below is a screenshot example of how FastGraphs can forecast investment returns at different points of time and valuation. In this example, I analyzed the return potential if the S&P500 continues to trade at its current EPS yield of 4.08% and if analyst estimates are accurate into 2027. Take a look:
The tools predicts a total annualized ROR of 13.34% with dividend reinvestment. That's not bad, but that's near the best case scenario. If earnings estimates are too high or if the index multiple compresses, meaning it declines to a lower multiple, this outcome would not be likely. Anything is possible: the multiple could continue to expand, the earnings could grow more than expected, etc.
Here's the take-home: it should be no surprise if the S&P500 trades down to its mean valuation or below. As investors, one of your biggest foes is yourself. You must learn to control emotion and make sensible investing decisions. What I like about FastGraphs is I can feel much more confident by knowing about a little bit more about "where I am" (in terms of valuation).
That's not all that FastGraphs can do. The tool is full of fundamentals, stock financials, and other information. This is just my most common use case. I use the tool to assess all my equity holdings. Here is Cigna Group, for example:
I use this information to set my buy price targets. The tool shows that if earnings estimates are accurate and the stock trades up to its recent mean earnings yield it has the potential to return 23.72% annualized ROR.
To be very clear, none of this is a guarantee of returns, none of this is investment advice. This is a demonstration of the tool. I have used the tool to identify many investment opportunities over the years. For example, I used FastGraphs to identify this opportunity that I wrote about in 2022:
Since then, Cardinal Health has returned over 200%. This is what I was looking at back then:
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