Investors are wondering what the right number is for the market as stocks leg lower on bad global data to close the week. Without taking a view on what the “right” price for the S&P 500 is, below we show a way to organize thinking about valuation in the short-term. In the table below we show a range of EPS growth rates relative to 2018 and a range of multiples on the resulting EPS numbers. The result is where the S&P 500 should trade given hypothetical earnings and how those are valued. For example, if you estimate EPS will fall 2% in both 2019 and 2020, and you value those EPS at a multiple of 15.0x, the S&P 500 is almost 700 points above where it should be! Alternatively, if you think EPS will be stable but should be valued at a relatively aggressive 19.0x, the S&P 500 should be trading near 3100. In the grid below, we’ve highlighted ~2800 values (roughly where the S&P 500 sits right now) to show the implicit EPS growth and multiple assumptions embedded in the price. Again, we don’t know the “right” combination of multiples and EPS growth, but if you’re extremely beared up with the Friday drop or think stocks are set to surge thanks to a dovish Fed, this analysis can help you see what sort of assumptions would need to play out for that to happen.

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