A simulation-based valuation of the S&P 500: October 2022

The figure below shows two simulation-based valuations of the S&P 500. They assume a fair price-to-earnings (PE) ratio for the S&P 500 that is the inverse of half of the 10-year U.S. Treasury yield. The price (at the top) is the most recent top value of the S&P 500.

The numbers on the left consider a rather benign scenario: S&P 500 earnings in 2022 are up by 10% from the previous year, and the 10-year U.S. Treasury yield is at 3.00%. The numbers on the right refer to a more likely scenario: S&P 500 earnings are up by 5%, and the 10-year U.S. Treasury yield is at 4.00%.

The second scenario takes us to a fair price for the S&P 500 of 2,693.12, which is 44.11% down from the most recent high. The video linked below discusses these simulations, some of the most recent values for the simulation inputs, and a few other options.