As a follow-up to our August 21st and 24th blogs, we believe the markets have properly reset the valuation levels. The average market multiple for the S&P 500 is 14.1 times earnings. Before all the recent market volatility, the markets were close to 18 times earnings; slightly expensive given the US economy’s slow growth (see May and June blogs). The market is now trading at roughly 15 times 2016 earnings. That is not expensive, nor is it dirt cheap.
The real question is: What is the correct market multiple? Granite Group believes that 15-16 times forward earnings is about correct when taking into account the low interest rates and current growth forecast. If Granite Group is correct and the markets trade at 15.5 times forward numbers, that would imply an approximate S&P target of 2015 in the next couple of quarters and eventually, 2250 based on 2017 earnings. The S&P 500 is at about 1950, the potential upside to the S&P target is about 3.3% and eventually 15% barring any unforeseen events.