Can anyone provide a way of calculating it and judging whether the market is overvalued/undervalued? Seems to be some inconsistencies…
I would go about getting Real S&P 500 = Nominal S&P 500 * (CPI on which prices are anchored / CPI Current)
And for the denominator, i’d get the real earnings for past 10 years using the same methodology as above.
Is this correct?
Yep, both nominator and denominator are multiplied by changes in CPI to express these in nominal terms. Model is mean reverting toward historical mean and such should be interpreted. Also it might be necessary to recall drawbacks. Model does not count for accounting policies changes. High or low deviation from the mean may persist which makes the model less applicable during short period forecasting.
This is INCORRECT
For real eanings, it’s Nominal Earnings (t) * (CPI on which prices are anchored) / CPI**(t + 1)**
+1