SPX -- Valuation Note

The stock valuation measure I use is based upon the long term centered trend of earnings,
the earnings plowback % and consideration of the long term inflation trend. The model now
has the SPX at fair value in a range of 1870 - 1990. Later in the year the FV range will rise to
1990 - 2120. SPX Chart

The chart shows  the SPX was moderately overvalued through late 2014 and much of 2015.
The SPX has recently traded slightly  below FV. This reflects the fact that index net per share
has fallen below the long term trend of earnings, which has in turn reduced the plowback %.
It also reflects investor concerns about the staying power of the current economic expansion,
worries over the slowdown in China and the stability of the banking system in view of the
weakening financials of many companies in the oil and gas patch. Although these issues may
prove to be of a passing nature, there is a longer term question that may deserve more attention
as time wears on. The longer duration issue has to do with possibly re - evaluating earning
power and growth potential if global GDP growth and business pricing power are to remain
subdued for an extended period. Investors may not wish to confront this possibility now, but
the issue will surely come up for consideration if earnings potential for both the current year
and for 2017 look to be more subdued than currently forecast by the consensus. Here, I
have in mind not so much the cyclical factors, but the longer range ones. Something to think
about.