This is a revisit of an article I posted on 9-12-2012. At the time I wrote “with a 2% 10 year risk free Treasury interest rate, the market is just way too low based on one popular measure of valuation, the discounted cash flow model…. If 3.5% is the normal equity risk free premium the S&P 500 should yield more like 5.5%. In order for that to happen, the S&P 500 would need to be about 1818. That’s nearly 400 points higher and if you assume each S&P point is equivalent to about 8 Dow points, that’s a 3200 point move in the Dow. That’s a 28.4% rise and it seems just about right to me when I look at how many blue chip stocks are trading far below their discounted cash flow.”
The market has risen half of that amount since September when I authored this piece. I am still holding to my prediction of 1818 on the S&P by December 2013. In fact that might be low considering this was done with very pessimistic growth assumptions. If you would like to review the full article from September 2012, click here.