- the melded probability distribution of my four scenarios (below);
- reflecting the continued and surprisingly low-interest-rate environment, I have increased the P/E ratios applied to each of the four outcomes from my previous fair market value calculation; and
- profit forecasts for 2013-2014 have been revised upward to reflect what has been reported and earned thus far in 2013.
"A good forecaster is not smarter than everyone else; he merely has his ignorance better organized." -- AnonymousBelow are the criteria and methodology I use to evaluate the S&P 500 and upon which I conclude that fair market value is approximately 1645 (it is overvalued by about 5% compared to Friday's close of 1740). Scenario No. 1 -- Economic Reacceleration Above Consensus (5% probability): The pace of U.S. economic recovery reaccelerates to above-consensus forecasts (3%-plus 2014 real GDP growth) based on pent-up demand in nondurable spending (cars and autos), rising consumer and business confidence and a sustained period of low interest rates. Corporate profit margins are preserved. The Fed begins tapering in January 2014. European economic growth rises to above 1% in real terms, and China's growth rate exceeds 8%. The disruptive influence of our politicians in Washington, D.C., is diminished and fails to adversely influence business/consumer behavior. The yield on the 10-year U.S. note exceeds 3.5%. S&P 500 profits for 2014 approach $120 a share. P/E multiples average 16.5x, producing a 14% 12-month upside. S&P target 1980.