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Why the S&P 500’s EPS Calculation Method Is Wrong
I recently read an article by Jeremy Seigel, the Ph.D. economist who currently teaches at UPenn, about how Standard & Poors computes its coveted 500 Index’s Earnings Per Share. Believe it or not, S&P calculates EPS of the index on a simple sum basis. Meaning, if every company earned .00/share, the Index will have earned 0/share.
Dr. Seigel proposed that S&P switch how it computes its EPS to a market weighted summed, similar to how it calculates the price of the Index. I agree with this methodology and strongly disagree with S&P’s response to why it currently uses its current method.
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