Jeremy Siegel - Fair Value for the S&P 500 is 2,300

Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and a senior investment strategy advisor to Wisdom Tree Funds. His book, Stocks for the Long Run, now in its fifth edition, is widely recognized as one of the best books on investing. It is available via the link below. He is a regular columnist for Kiplinger’s, a “Market Master” on CNBC and regularly appears on Bloomberg, NPR, CNN and other national and international networks

I spoke with Siegel on Monday, November 24th.

Jeremy Siegel

In our interview on November 29th of last year, you said that investors could expect a 10% to 15% return on the S&P 500 this year. On that day the S&P closed at 1,815 and on Friday it closed at 2,064, which is a 13.7% gain. Congratulations.

Another good year. You wonder about how long a streak like that can continue.

Well, that’s my first question. What do you consider the fair value of the S&P 500 to be today?

I consider the fair value of the S&P 500 to be approximately 2,300. That is not necessarily a forecast for the end of this coming year, but I believe we are in a permanently lower interest rate environment, which supports higher than historical valuations for equities. I still believe P/E expansion is in the cards. An 18 to 20 P/E ratio is appropriate given what Bill Gross dubbed the “new neutral” interest rates that we are likely to see in the coming decade.

What would cause you to be more bearish?

Of course there are always isolated bearish events – terrorist attacks, pandemics, things like that. What we saw with Ebola a little more than a month ago is representative of them.

But as far as structurally bearish events, I worry about a tightening of the labor force that brings about an inflationary rise in wages, meaning that we cannot continue at the 200,000 monthly pace in the non-farm payrolls that we’ve had. We are not adding to the labor supply enough to absorb it. We are not even increasing the labor force enough to offset the increase in the payrolls, and that is why the unemployment rate is going down so rapidly.
Ultimately, we are going to come across a constraint where the demand for labor exceeds the supply, putting inflationary pressures on wages, forcing the Fed to tighten more than I anticipate at the current time.

One of the big disappointments that we have seen in the U.S. is productivity growth. It plunged in the first quarter of this year. GDP growth was way, way down that quarter, but it didn’t snap back in the second and third quarters to anything that is exciting. It’s disappointing in this internet-connected world where there are so many laborsaving devices that we haven’t sparked productivity increases.