Run the numbers, and it's closer than you think.
How long before we see the FTSE 100 rise above 8,000?
You might think that the question is insane. After all, in March 2009 -- less than two years ago -- the FTSE sank below 3,500. Scary days, in short, with much talk of The Great Depression.
Even today, we're hardly out of the woods. Eurozone worries, public spending cuts as the government tries to bring the deficit under control, tax rises -- it's not difficult to find bad news.
Equally, it's not difficult to find good news, although that tends to get less exposure in the media. Right now, there are sparkling figures from the UK's manufacturing sector, strong economic growth in many overseas markets (and many FTSE 100 shares have decent overseas earnings, don't forget), and better-than-expected figures in terms of American consumer and corporate finances.
And don't forget, either, that before the FTSE's sickening plunge to 3,500, the index had reached 6,700 -- from where a mere 20% rise would have propelled it past the 8,000 mark.
So here are three different takes on how long it will be before we see 8,000.
1. Compound growth
The last decade hasn't been as good for stocks as most previous decades, that's for sure. The prestigious annual Barclays Equity/ Gilt study, for instance, has called it The Lost Decade.
The study has also dampened down expectations of long-term returns from the FTSE: 7% or so per year, versus the long-term trend of around 9%.
So let's take that 7%, and strip out the FTSE's current dividend yield of 3%, which gives us a 4% increase in capital values each year. And now let's apply that 4% growth rate to the FTSE's present level of 5,800.
The answer? In short, it's going to take around eight and half years to get there -- some time in mid-2019, in other words.
2. Rising earnings
That might be excessively gloomy, though. Let's consider all the data pointing to promising corporate earnings growth.
The FTSE 100 is currently trading on a forward P/E of around 12, which is hardly demanding. So let's assume no change in investor sentiment -- in other words, the P/E stays the same -- but factor in rising corporate profitability.
The answer? From where we are now, an annual increase in earnings of just over 8%, if sustained for four years, would see the FTSE hit 8,000, assuming a constant P/E of 12. Or, if sustained over three years, an 11% annual increase in earnings would deliver the same level of 8,000.
BRAND NEW INVESTING SERVICE!
Introducing Motley Fool Dividend Edge
Join us as we uncover companies that can give you an investing “edge” by focusing on High Yield shares paying great dividends. Discover how you could generate substantial returns for yourself simply by COPYING the moves of one of the Motley Fool’s most highly-regarded investment gurus. He’ll tell you what to buy, when to buy it, when to sell it. All you have to do is sit back and reap the rewards. CLICK HERE for full details
Neither earnings increase figure looks ridiculous to me, bearing in mind where we are in the economic cycle. Better still, a lot of heavy hitters in terms of the FTSE's corporate earnings make-up are poised for a recovery -- beaten-down BP (LSE: BP), for instance, as well as the banks, house builders, insurers and so on.
So we're talking a FTSE of 8,000 that may be just three and a half years away -- mid-2014, in other words. That's rather better than mid-2019, for sure.
3. Rising P/E
Now let's factor in a change in sentiment as well. Corporate earnings grow at 9%, say, over the next two years, while the market's mood places the FTSE 100 on a P/E of 14 -- again, hardly demanding, and well below (say) the FTSE 250's present P/E of 18.
That gives us a level of 8,000 that is just two years away, at the end of 2012.
And again, I'd stress, the assumptions aren't demanding or ludicrous: a 9% rise in corporate earnings over two years, and a P/E of 14.
Even better, one year's earnings growth of 9% and a slightly higher P/E of 15 would see us hit 8,000 at the end of 2011.
These calculations, I'd stress, are 'mind games' -- back of the envelope scribbles with a pencil and calculator.
Nevertheless, the story that they tell is revealing. When people hear the Fool's David Kuo talk of FTSE 8,000, it's tempting to dismiss such talk as mere speculation. Yet the underlying numbers show how very possible it is.
But will it happen? We'll have to wait and see.