Optimism on Parade

By Peter Brock, May 31

Sell in May and go away, father said. Too soon to tell if this year was a good year to follow that old advice. The market put in a strong performance anyway, great for profit-taking and frustrating for those on the sidelines or underweight in an abundance of common sense. The month ended with a slight increase in intrinsic value on softer bond yields.

The S&P 500 started to trade in the BV danger zone on March 18, 2022 (when the S&P 500 was 4463). Based on historical relationships, the danger zone is above the dotted red line on a BV chart. This is a risky place to be, where the market is vulnerable to larger than normal bear markets and ten-year expected returns are negative.*

*-1.2% per year over the subsequent decade (median compound annual real total returns, S&P 500, 1960-2023)

Brock Value Latest Ten Years

Ten years of Brock Value, showing valuation bands above and relative pricing below. Click chart to enlarge
US GDP (Est) Corp Bond Yield S&P 500 Brock Value Overpriced By
$28.450t 5.62% 5280.33 2531.15 108.6%
These are the latest numbers, updated to May 31. With US GDP at an estimated $28.450 trillion and medium-term corporate bonds yielding 5.62%, the intrinsic value of the S&P 500 index as measured by Brock Value is 2531.15.
By comparison, the S&P closed at 5280.33 on May 31, 108.6% above Brock Value. Click the chart to enlarge.

Understanding Brock Value charts

Brock Value is the first clear answer to the question: what is the market worth? BV is a valuation metric with just two inputs: GDP and interest rates. Compared to questionable old-school metrics (and even popular ones like Shiller’s CAPE), BV provides reliable measurements, especially at critical turning points.
brock value 1960 to present

The red and green lines fence in the normal range of the market, 30% higher and 20% lower than BV, the white line, respectively. Click chart to enlarge.
Valuation Return
Above Red Line -1.2%
Fair Value 6.3%
Below Green Line 10.1%
Subsequent 10-year returns, median compound annual real total returns, S&P, 1960-2023

The red and green lines found on most of the Brock Value charts on this site indicate the normal range of the market. The dotted red line indicates 30% overpricing, while the dotted green line represents 20% underpricing. These guidelines serve as boundaries, beyond which valuation is extreme in one direction or the other. When the market (the yellow line) trades above the dotted red line, it is highly overpriced. When this happens, my analysis shows that returns over the following ten years tend to be negative. Conversely, when the market trades below the dotted green line, it is underpriced and returns over the next ten years will most likely be much higher than average.