I came across this Morningstar article regarding indexes valuation. The author used a bottom-up approach and calculated the true value of S&P by adding the fair values of the constituents as calculated by Morningstar analysts covering the stocks. Based on their focus on ROC and from what I can tell, Morningstar analysts' valuations are based on a discounted EVA (or variation thereof) combined with Sage's moats. The results came in surprisingly close to the market prices: S&P500 1.7 points overvalued, DJIA 3.6 points undervalued, NASDAQ 4 points overvalued

If 70% of the market is institutional indexing, and sector-rotation has such a big influence on the index level, how come the S&P price is within 2 points to a quantitative, bottom-up technique combining 500 stocks? Can the wisdom of the crowds truly be that powerful?


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