• Assume the average 10-year T-bill rate for year 2002 is 4.5%
• Using the Fed Model, get an S&P 500 Fair Value P/E of 27
• Use the 2002 S&P estimated earnings of $35.47
• The year-end S&P index should then be 27 x 35.47 = 957.69
• The current S&P 500 is 917.93
• The S&P 500 is then 917.93 / 957.69 - 1 = -0.0415 or 4.15% underpriced

Is this a realistic calculation?

According to Standard and Poor's (as of June 28, 2002):

• the Total Market Capitalization of the S&P 500 was $9091B.
• the P/E Ratio was 40.07
• Using P/E = (Total Mkt Cap)/(Total Earnings), we get Total Earnings = 9091/40.07 = $227B.
• If we use S&P Index = (P/E) x "E", then, for an Index of 989.82, we must have "E" = 989.82/40.07 = $24.70.
• Hence, P/E for the S&P 500 is calculated as: P/E = (SP Index)/"E" where P is the Index itself and "E" is the S&P "Earnings" figure.

Standard & Poor's reports an end-of-June P/E of 40.07