Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Thoughts On S&P 500 Earnings, Valuation And Returns

By Ed YardeniStock MarketsNov 22, 2020 11:51PM ET
Thoughts On S&P 500 Earnings, Valuation And Returns
By Ed Yardeni   |  Nov 22, 2020 11:51PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

The following is the Introduction to our latest study in our "Predicting the Markets" series. The paperback and e-book are available on Amazon here. The other studies in this series are available on my Amazon author's page here.

I started my career on Wall Street in 1978. I spent the prior year at the Federal Reserve Bank of New York in the economics research department after receiving my undergraduate degree in economics and government from Cornell University in 1972 and my PhD in economics from Yale University in 1976. Over the past 40-plus years, I’ve worked as both the chief economist and the chief investment strategist at several firms on Wall Street. Since January 2007, I’ve been the president of my own consulting firm, Yardeni Research, Inc.

My job continues to be to predict the financial markets, particularly the major stock, bond, commodity, and foreign exchange markets around the world. I’ve learned a lot about these markets over the years. I recently started sharing what I’ve learned in a series of books and studies.

In this study, I will focus on the S&P 500 stock price index, examining how it is determined by the earnings of the 500 companies that are included in the index and the valuation of those earnings by the stock market.

Why pick the S&P 500?

The S&P 500 is a stock market index that measures the stock price performance of 500 large companies listed on stock exchanges in the United States. It is one of the most widely followed equity indexes. The stocks in this index are a representative sample of leading companies in leading industries. Many equity managers benchmark the performance of their portfolios to the S&P 500. Among the largest exchange-traded funds are those that track the S&P 500. The S&P 500 represents more than 83% of the total domestic US equity market capitalization.[1]

The widely followed Dow Jones Industrials Average (DJIA) has only 30 companies. It was launched in 1896 and was a spin-off of the Dow Jones Transportation Average, which was first compiled in 1884 by Charles Dow, the co-founder of Dow Jones & Company. The S&P 500 dates back to 1923. That year, the Standard Statistics Company (founded in 1906 as the “Standard Statistics Bureau”) developed its first stock market index, consisting of the stocks of 233 US companies and 26 industries, computed weekly. (The company also began rating mortgage bonds in 1923.) In 1926, it developed a 90-stock index, computed daily. In 1941, Poor’s Publishing merged with Standard Statistics Company to form Standard & Poor’s (S&P). On March 4, 1957, the index was expanded to its current 500 companies and was renamed the “S&P 500 Stock Composite Index.”

The components of the S&P 500 index and other S&P indexes are selected by the firm’s US Index Committee, which meets monthly. All committee members are full-time professional members of the firm’s Indices staff. At each meeting, committee members review pending corporate actions that may affect the indexes’ constituent companies, statistics comparing the indexes’ composition to the broad stock market, candidate companies under consideration for addition to an index, and the bearing of any significant market events on the indexes.

The committee identifies important industries within the US equity market, approximates the relative weight of these industries in terms of market capitalization, and then allocates a representative sample of stocks within each industry of the S&P 500. There are 11 sectors according to the Global Industry Classification Standard (GICS): Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities.[2] These sectors are further divided into 24 industry groups, 69 industries, and 158 subindustries.

Candidates for inclusion in the S&P 500 index must meet specific criteria in eight areas: market capitalization, liquidity, domicile, public float, GICS, financial viability, length of time publicly traded, and stock exchange listing. The index is reconstituted quarterly, though changes are made infrequently.

The S&P 500 index is a free-float, capitalization-weighted index. That means that companies are weighted in the index in proportion to their market capitalizations. To determine the market-capitalization weight of a company, only the number of shares available for public trading (free float) is used. Shares held by insiders or by controlling shareholders that are not publicly traded are excluded from the calculation. The largest companies (based on market capitalization) in the S&P 500 account for a substantial portion of its total market capitalization. Since the index is market-capitalization weighted, these companies have the greatest influence on the index’s price performance.

Notwithstanding occasional bear markets, the S&P 500 has been a great investment over the years—so much so that “S&P” could stand for “Success & Profit.” Since January 1, 1955, through September 2, 2020, the index has been down in bear markets during 3,029 of the 16,535 trading days—i.e., just 18.3% of the time. It has risen at a compounded annual rate of 6%, a rate that doubles the value of this portfolio every 12 years. And that doesn’t include the dividend return provided by many of the S&P 500 companies.

The first chapter in our study covers the various measures of earnings for the S&P 500 and why we favor forward earnings among them. The second chapter discusses various models of valuation, again focusing on the S&P 500. The final chapter uses the resulting analytical framework to review how it has worked in good times and bad, focusing on the Great Financial Crisis and the Great Virus Crisis.

[1] See S&P Global, S&P 500: The Gauge of the Market Economy and S&P U.S. Indices Methodology, August 2020. See S&P Dow Jones Indices.

[2] The Global Industry Classification Standard is jointly developed and maintained by S&P Dow Jones Indices and MSCI.

Thoughts On S&P 500 Earnings, Valuation And Returns

Related Articles

Thoughts On S&P 500 Earnings, Valuation And Returns

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email