Pay Attention to Valuation
10 Pages Posted: 3 May 2004
In the article the two approaches to the market's valuation are considered. The first one is based on using of the model of alternative investments, which is the second approximation for the Fed's model. The role of the model of alternative investments has increased for last 25 years since it allows describing of about 88% of results. It is interesting to note that the Fed's model itself describes only 73% of the results during the last 25 years. The second approach is based on a new method of valuation - Relative Earnings Accumulation Rate. This method is put in practice in order to describe the concept of earnings accumulations for the stock market. It allows estimating a difference between relative rates of growth of earnings and market. It is shown that during periods of essential earnings accumulation, when the meaning of REAR exceeds 100%, the market's growth is moderate enough. But such conditions create the basis for further great long-term growth of the market. The latest reading of REAR shows that the market's growth is supported by REAR's growth. It is a positive sign. However, in order to keep the process of earnings accumulation in the future and to create the base for the long-term bull trend the earnings growth should essentially outstrip growth of the market. As the earnings growth in the coming decade could appear moderate enough, the potential for growth of the market can be sufficiently limited as well. All the above indicates the cyclic nature of the current bull trend of the market.
Keywords: Market's valuation, valuation model, profits cycle, earnings, growth rate, P/E ratio, earnings accumulation, Fed's model, CRB Spot Index, 10-Y Treasury bond yield, Federal Funds rate, current earnings yield, earnings growth, gold
JEL Classification: C00, C12, C13, C22, C50, G00, G12
Suggested Citation: Suggested Citation