Tech and financial stocks - jet fuel for the S&P 500?
If the value of the information technology and finance sectors had held at their average level since 1995, all other things being equal, the S&P index would be trading at its 1950 level - 19.3% above the current price.
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The cost of information technology and finance is holding at unprecedentedly low levels
Despite the fact that since the beginning of the year S&P 500 Index rose by 14.5%, the two largest financial sectors - technology and finance - continue to trade below their original value. When measured by the P/CF ratio, the information technology element of the S&P 500 Index trades 45% below its average value of 14.73 since 1995.
When measuring the P/B ratio Finance (banks, real estate, insurance and various financial instruments) are trading at 69% below their average value of 1.96 since 1995.
Will the S&P 500 index be able to trade at 2,000 in 2015?
The total weight of the information technology and finance sectors in the S&P 500 is 34.1%. Multiple increases in these two sectors alone would have had a significant impact on to determine the full value and price level of the S&P 500.
The current P/E ratio is 16.0, based on a weighted harmonic average (the preferred method of calculating fundamental ratios on indices). If the value of information technology and finance increased to their average value, which would cause their prices to rise by 45% and 69% respectively, the P/E ratio would rise to about 19.3, which would be slightly overstated, depending, of course, on interest rate и Inflationary expectations. The calculation is based on the fact that the prices of the other sectors remain unchanged. A multiple in just these two sectors would push the S&P 500 to the 1950 area, or about 19% above its current price.
These calculations do not take into account improvements in the economy and increases in nominal prices and incomes. They do, however, give a clear indication of potential momentum of the S&P 500 price level. If in the next couple of years the value of these two sectors returns to the average value, taking into account the nominal growth of economic activity, then A price level of 2,000 for the S&P 500 Index in 2015 will no longer seem improbable. Of course, this will depend on a couple of factors, such as the absence of significant destabilization in the Eurozone and the region's return to growth. Second, emerging markets need to continue to grow without any obstacles from China.
Contributed by Peter Garnry