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Free version w/old data (data as of February 2020).  Join to see what this data looks like today. Note: i3PO best used on a laptop or desktop.

Analyze the S&P 500

i3PO's S&P 500 analysis walks you through key data trends, frames bull and bear cases and provides tools for you to come to your own views of risk and reward.

primer
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1. Fundamentals
Step 1 of 3: Fundamentals 
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i3PO's process:  fundamentals  x  valuation risk/reward

Why important: The path of fundamentals is the single-most important driver of returns over time: Stocks or indices where fundamentals are improving/growing, tend to go up...and vice versa.

How to use this section: First, look at the S&P 500 earnings chart to see the long and short-term trends for earnings, the key driver to forecast. Second, look GDP, LEI and bond market signals for how the future may evolve. Third, evaluate on our framework.

S&P 500 Index

  data here is what you would have seen at i3PO on February 15, 2020  

 1A.   Start with what's most important. Review trends for S&P 500 EPS.
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Why important? In a simple sense, the S&P 500 is driven by the amount of earnings (EPS) and the multiple paid. How EPS trends is clearly important, perhaps the most important driver over time.​ 

Source: Company earnings reports.  Timing: Companies report quarterly; Consensus expectations are updated constantly.

Note: these are the sectors and largest positions in the S&P 500.

 1B.   Next, evaluate GDP, a top-down macroeconomic data point that correlates to S&P 500 EPS.
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Why important? An imperfect but perhaps the best-we-have measure of how the economy is doing. It measures the value of goods and services produced within a given time period.

Source: US Dept of Commerce, Bureau of Economic Analysis. Timing: Quarterly. Link: https://www.bea.gov/data/gdp/gross-domestic-product

 1C.   Review trends for leading economic indicators of GDP to get a signal of what might happen next.
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Why important? Much economic data is lagging (e.g., GDP, employment). It tells us what happened but has limited potential predictive power. Leading economic indicators are a basket of indicators that are meant to help given insight, or predict, where other economic indicators may end up trending in the future. 

Source: The Conference Board. Timing: Monthly. Linkhttps://www.conference-board.org/data/bcicountry.cfm?cid=1

 1D.   Review bond market signals.
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Why important? BAA-rated bonds are corporate bonds that are relatively low risk, but one measure above junk (they are the lowest investment grade rating). The spread between these corporate bonds and the "risk-free" 10 year treasury bond is another signal of investor's perception of risk and future economic trends. If this spread begins to widen, investors are sensing trouble and, thus, demanding higher rates (from 200bps to 600 bps before the 2008 recession).

Source
: Multiple. Timing: Daily.
Linkhttps://fred.stlouisfed.org/series/BAA10Y

 1E.   Finally, analyze how business fundamentals may evolve using i3PO's 2x2 framework.
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Here are the last 12 months (LTM) and next 12 months (NTM) consensus expectations mapped onto i3PO's 2x2 framework. Review how consensus expects businesses in the index to evolve, how those expectations have changed recently and think about where your views agree or disagree.

S&P 500 EPS trends

-2 LTM

EPS

YoY

151

19.3%

LTM

153

1.5%

NTM

174

13.9%

EPS: Quadrant progression & consensus change
LTM
BULL-ish

EPS has GROWN at a WORSENING rate (1.5% vs 19.3%)

NTM
BULL

EPS is expected to INCREASE at an IMPROVING rate (13.9% vs 1.5%)

Over the last 60 days, consensus expectations for NTM EPS have gone from 164 to 173, which is a +5% change.

Notes on i3PO's framework: We ask two simple questions:

1. Are fundamentals growing or declining?

2. Is the rate of growth improving or worsening?

Why these questions? Stocks or indices tend to follow the rate of growth (positive or negative) over time.

Growing earnings, for example, usually means a rising stock or index price over longer periods of time.

 

Also, the change in the rate of growth often drives stocks (improving or worsening). Stocks or indices whose fundamentals grew at 5% last year and then inflect to 20% next year often are the most bullish situations. And vice versa.

2. Valuation
Step 2 of 3: Valuation 
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i3PO's process: fundamentals  x  valuation risk/reward

Why important:  To forecast the direction of the index, correctly anticipating fundamentals is just one component. You also have to anticipate how the market will value those fundamentals.  

How to use this section: Go through the charts below and read the related commentary. The top two talk through the market valuation directly. The bottom two are drivers of valuation to equities indirectly: the level of volatility and interest rates. 

S&P 500 Index

  data here is what you would have seen at i3PO on February 15, 2020  

 2A.  Start by taking a look at recent returns for S&P 500
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Why important? The bellwether stock market index in the world. The index is composed of 500 large capitalization companies in the United States.

Source: S&P Dow Jones. Timing: Daily. Linkhttps://us.spindices.com/indices/equity/sp-500

 2B.  With that context, evaluate the valuation multiple being paid over time.
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p/e
multiple
19.5
z-score
1.8

OBSERVATION: In terms of valuation, the S&P 500 currently trades at 19.5x EPS. This is 1.8x standard deviations from the recent trend, which is a signal that the mark is VERY BULLISH on how businesses will trend in the future.

IMPLICATIONS/QUESTIONS: If you are bearish, the market clearly has the opposite view. Take some time to think through why. If you are bullish, you are getting credit for your view, what drives this further?

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Why important? The price that the market is paying for EPS is an indication of the market's optimism or pessimism regarding future economic and profit trends.  Source: Multiple. Timing: Daily/constant.

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 2C.  Next, take a look at the Vix index, a measure of volatility in the equity market. As volatility decreases, the valuation multiple tends to expand. As volatility increases, the valuation multiple tends to contract. 
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Why important? By taking the implied volatility in options on the S&P 500, the CBOE backs into the forward volatility expectations for the S&P 500. This gives a unique measure of market expectations for future risk or uncertainty. Note that the VIX can move dramatically from day to day.

Source: Chicago Board of Options Exchange (CBOE). Timing: Daily trading. Linkhttp://www.cboe.com/vix/

 2D.  Review interest rates. If interest rates are low in fixed income markets, money tends to flow towards other markets such the stock market. The result is a higher equity market valuation multiple, all else equal.
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Why important? Markets are interconnected; What goes on in the fixed income market impacts the equity market and vice versa. In fixed income markets, low interest rates stimulate buying and borrowing for companies and individuals. This, in turn, influences profit streams to companies. What has been the current trend? Monetary policy has driven interest rates to the lowest levels on record. This is possible given there has been little to no inflation. If inflation was high, typically central banks would have to raise interest rates to prevent the risk of a large increase in inflation. This is why both are tracked above. If inflation stays lower for longer, one can argue interest rates will stay low (and valuations high). 

Inflation Source: US Bureau of Labor Statistics. Timing: Monthly.  10 Year source: Multiple. Timing: daily trading.

3. Risk/Reward
Step 3 of 3: Risk/Reward 
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i3PO's process: fundamentals  x  valuation risk/reward

Why important:  Ultimately, you want to have a good view of the risk of losing money vs the reward of making it. i3PO's process culminates with calculations on risk and reward, upside and downside, so you can make better decisions.

How to use this section: Follow the steps to evaluate risk and reward. First, I'll help you by framing a bull and bear case and reviewing market signals. Then, we can work together on your own case with your assumptions. 

S&P 500 Index

  data here is what you would have seen at i3PO on February 15, 2020  

 3A.  Start by reviewing a framing of the bull and bear case from here. This is just a starting point for you to formulate your own views in the sections below.
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Framing a Bull & Bear Case
As seen on i3PO on February 15, 2020

A Bull Case:

1.  The market and consensus understand that there were items holding back the economy, for example trade tensions with China, that are now removed. This has artificially pushed down GDP and earnings. 
 

2.  Low inflation will continue, keeping the Fed and other central bank's loose monetary policy going. This adds up to another year of earnings growth and multiple expansion. 
 

3.  Also, as the cynical bull may argue: where else can you get a return on your money given such low rates?

The simple math for the S&P 500: 

  • EPS: +15% growth off the trailing 12 months of 154 = 177, then +7% expectation from there = 189 
     

  • Multiple: Very high end of range = 21x (note this is applied to the expectation above as it is forward-looking, 12 months from now)
     

  • This equates to 3,969, or about 15% higher than here​​ in 12 months

A Bear Case:

1.  There are lots of risks. Mainly, the United States is undergoing one of the longest economic expansions in history. While growth has been slower than usual, expansions don't last forever. 

2.  Central banks have flooded the world economy with money. This can help growth but, if done too much, can lead to bad endings as risk is mispriced and too much debt is taken on by companies and individuals. 

3.  Finally, the market rally already embeds an increase in earnings and uptick in GDP.  Why allocate capital into that pricing? And what if earnings don't grow at a high level? What if the coronavirus continues to ramp and/or hit the US hard?

 

The simple math for the S&P 500: 

  • EPS: +5% decline off the trailing 12 months of 154 = 161, then +3% expectation from there = 166
     

  • Multiple: A bit below average = 17x (note this is applied to the expectation above as it is forward-looking, 12 months from now)
     

  • This equates to 2,823, or about 15% lower from here in 12 months

These are obviously not the only 2 scenarios possible. They are provided to help stimulate your own thinking. i3PO wants you to make up your own mind, just do it intelligently - with math, data & logic.

 3B.   Review market signals that may challenge or confirm your views.
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Market signal: Short interest (how many believe downside to the stock price from here?)

OBSERVATION: The number of S&P 500 contracts reported to the CFTC (the commodity futures trading commission) is -0.2 standard deviations from the 1 year average. Note this is not much different than the average of the past year so there is not much signal currently.

IMPLICATIONS/QUESTIONS: Questions you should ask are (1) is the level of short interest aligned to my view and (2) is the trend agreeing, or disagreeing, with me? Short interest is simply another data point to consider. If there are lots of people disagreeing with you, you should take some time to ensure you understand why they are wrong.

Market signal: Options (are options prices indicating bullish or bearish views?)

OBSERVATION: The cost of put vs call options is now -0.5 standard deviations from the recent trend. This is a slightly BEARISH sign, people are paying a bit more for puts versus calls.

IMPLICATIONS/QUESTIONS: Options can be useful signals as part of a broader process, but the prices change a lot all the time so be careful not to over-interpret its meaning in isolation.

 3C.  Evaluate your base case scenario
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Up until now, you have been reviewing information i3PO provides. Now you can begin to integrate your own thinking to evaluate risk and reward. i3PO has gathered relevant information below.
 
Input your assumptions on fundamentals and valuation in the yellow boxes to get started. After seeing the results, i3PO can give you feedback on your assumptions, if desired.
Price-to-Earnings (P/E) Analysis
S&P 500 Index
As seen on i3PO on February 15, 2020
Input Your Assumptions
Enter EPS forecast (NTM)

x

Growth % past NTM

=

EPS for multiple
Data and Commentary
Compare your forecast
Amount
% Diff

vs LTM

vs NTM

Enter your next 12 month EPS forecast (NTM) and then growth for NTM from there. Why growth past NTM? Given we are forecasting a 12 month return and are using forward multiples, your NTM forecast will have happened in 12 months and the market will be focused on growth from there. 

x

Valuation multiple 
Multiple
Z-Score

=

Implied index price
Current
You
Compare your forecast to the current multiple. Also, take note of the z-score to ensure you understand how different your forecast is from the recent range.

/

Enter current index price

=

% up, downside
Index price
This is the price as of February 15, 2020
Dividends are expected to be 63 over the NTM. This equates to a yield of 1.9% at an index of 3380. This is a return in addition to the above calculation.
i3PO will take a look at your assumptions and give you feedback. This can be a helpful check as if you were testing your assumptions with a peer or co-worker. Click below (note audio may not work on mobile).
click for i3PO's feedback

I'm thinking through your assumptions...

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