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Dr. Jeremy Siegel Opines
[By Staff Reporters]
According to Financial Advisor News – an electronic trade magazine on March 17 2009 – Standard & Poor’s underestimate the earnings of its S&P 500 Index. So says, Jeremy Siegel PhD, a finance professor at the University of Pennsylvania’s Wharton School of Business and author of Stocks for the Long Run.
The Dilemma
The problem started when the Wall Street Journal ran an op-ed piece by Siegel that argued Standard & Poor’s uses a “bizarre” methodology for calculating the earnings and P/E ratio for the S&P 500. In it, Siegel explained that the earnings of S&P 500 companies are currently treated equally, but should instead be weighted in proportion to their market capitalization. Market capitalization weighting, he noted, is used to measure the S&P 500 returns. Such a system gives larger weight to the earnings of a company such as Exxon-Mobil, and lower weight to an S&P 500 member such as Jones Apparel.
Siegel’s Example
For example, “a 10% rise in Exxon-Mobil’s price would boost the S&P 500 by 4.64 index points, while the same fall in Jones Apparel would have no impact since the change is far less than the one-hundredth of one point to which the index is routinely rounded,” Siegel wrote.
Outcome
As a result of the above, if capitalization weightings were applied to 2008, the earnings of S&P 500 companies would have been $71.10 per share instead of $39.73 per share.
S&P’s Support
In response, an S&P official said Siegel’s argument “fails the test of both logic and index mathematics.”
Conclusion
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Filed under: Career Development, Financial Planning, Investing, Portfolio Management | Tagged: common stock, David E. Marcinko, financial advisor, Financial Planning, Investing, Jeremy Siegel, Market capitalization weighting, S&P 500 Index, S&P companies, stock broker, stock index, stock market, Wharton School of Business | 3 Comments »
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