Peter Boockvar: If Yellen loses control, what should the S&P’s multiple be?

Is Janet Yellen losing influence over the stock market? Peter Boockvar makes an interesting point on what that might mean for valuations:

I’ll just say that it’s clear that the Fed is in the process of losing control of influencing the stock market and if one believes, as I do, that valuations got as extreme as they did over the past few years for the sole reason that the Yellen put was perceived as effective, the contra now is taking place where valuations get rethought as the put is no longer in play.

Assuming for the moment that S&P 500 2015 earnings estimates just stay the same at $118 (even in the face of peak profit margins and major headwinds on 40% of S&P overseas earnings), using the simplistic valuation metric of just slapping a P/E multiple on one year of earnings gets us to a 16.4x ratio. This is down from 17.8x when the S&P 500 was at 2100. What if we’re heading to 15x? That’s an S&P 500 at 1770. On a 14x multiple, the S&P 500 goes to 1650. Use a higher multiple because interest rates are so low some say? The flip side is interest rates are so low because revenue/cash flow growth is so slow. Bottom line, a few weeks ago I believed that the odds were greater than 50% that a bear market in stocks had begun and considering the action post FOMC combined with 80% of NYSE stocks trading below their 200 day moving averages, the odds continue to grow.


Peter Boockvar
Managing Director and Chief Market Analyst
The Lindsey Group LLC

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