At the same time, inflation also gets ignored by the raw index value of the S&P. Lately, inflation hasn’t been a huge concern, but the roughly 2% annual rate of inflation over the past five years has nevertheless wiped out most of the dividend income that the stocks in the index have paid to investors.
3. The S&P’s earnings are much different than they were in 2007.
In assessing the market’s future course, it’s tempting to look at what happened the last time the S&P 500 was this high. We all know far too well what came next back then: The financial crisis led to a massive market implosion that took more than 50% of the S&P’s value away over the ensuing 18 months.
But the fundamentals underlying stocks are much different this time around. Back in 2007, the stocks in the S&P produced about $82.50 per S&P-weighted “share” in earnings and, based on the S&P’s record close in that year, the index traded at about 19 times earnings back then. In 2012, however, the S&P’s earnings soared to almost $102.50, meaning that, even at today’s record, we’re only at 15 times earnings. Moreover, analysts expect even bigger earnings gains this year.
Moreover, we can arguably be more confident about earnings now than we should have been back in 2007. Looking back, earnings for financial giants JPMorgan Chase & Co. (NYSE:JPM) , Bank of America Corp (NYSE:BAC) , and Wells Fargo & Co (NYSE:WFC) were misleadingly high, as they all eventually suffered huge losses in ensuing years. In hindsight, the problems that those banks had were building up, even as the S&P rose to new heights; but the full impact of their missteps didn’t hit their earnings until later. Although some would argue that similar problems may be hiding among balance sheets today, we’ve nevertheless come a long way toward getting accounting issues out into the open.
Stay calm and invest on
So, even as the news trumpets the fact that the S&P 500 has hit new record highs, be sure to keep your investments in perspective. Making too much of records will distract you from having an overall long-term investing plan that covers bull markets and bear markets alike.
The article Why the S&P’s Record High Isn’t as Important as You Think originally appeared on Fool.com is written by Dan Caplinger.
Fool contributor Dan Caplinger owns warrants on Bank of America and JPMorgan Chase. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo.
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