Unfortunately, optimistic views on our economy and/or our markets are generally met with resistance and even criticism. One of the most common arguments to counter my optimism is the statement by my antagonists that they are realists. Thereby they are implying that my optimism is unrealistic, and moreover, that a pessimistic outlook is more realistic than an optimistic one. Yet, there is a preponderance of supporting evidence for optimism that many ignore or refuse to even consider.
In an attempt to clarify my point, I presented the following F.A.S.T. Graphs™ (actually one very close to this one, but with slightly different dates) in my most recent article illustrating that the S&P 500 is modestly undervalued at this time. The orange line on the graph represents a P/E ratio of 15 applied to an earnings growth rate (slope of the line) of 7.7% since the beginning of calendar year 1993. All of the data is historically actual, with the exception of an estimate for 2012 earnings currently at $104.70 per share.
Now, what this graph clearly shows is that the actual blended P/E ratio of the S&P 500 of 13.1 based on actual earnings since 1993, is one of the lowest it has been (remember the orange line is a P/E of 15). This is not a statistical reference, but a picture of what has actually occurred and how the market has actually valued the S&P 500 since 1993. Clearly, the market has overvalued the S&P 500 (the black price line above the orange line) for most of this almost 20-year period, until and since March of 2011.
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