Valuation Snapshot - US Stocks, Sept 23, 2005
Uncertainties prevail in the economy, and in projections of corporate earnings, so I''ll look at some fairly conservative estimates for earnings to try to make a call on where US stocks are today. Here is my latest crude spreadsheet on this; the earnings estimates are from Thompson Financial.
The S&P 500 closed today at 1215.19. If we look at the "as reported" earnings for the past twelve months for that big basket of stocks ($71.40/share), we calculate a price-to earnings ratio of 17.02, right in line with the average P/E of 17 since 1960 (Jeremy Siegel), though a little higher than S&P's reported average of 15.65 since 1935. By these measures, the US stock market seems to be in "fair value" range, and certainly represents a good value for investors when compared with the stock market from the more recent past.
When S&P's very strict "core" earnings are projected for the current calendar year, we achieve a slightly fattier P/E ratio of 18.63 for the current market. Current year "as reported" earnings, still more conservative that the 12 month forward estimates, let alone the inflated 12 month forward "operating earnings" projections, brings in our lowest P/E ratio of 16.42.
Not too bad. But there are a couple of sticking points: in spite of all of the excess corporate cash we keep hearing about, the dividend yield on the S&P 500 is still just a measly 1.7%, hardly the lofty percentage projected by the advocates of the dividend tax cut, and well below the long-term average of the US stock market.
Ed "Y2K" Yardeni is fond of using 12 month forward operating earnings to make some rather bullish (recently, anyway) projections about where the stock market will be in the near future. After all, contends Yardeni, investors discount the future, not the past.
But as we've seen earlier in the week, and as Steve Roach reiterated this morning, the future is where the uncertainties and the potentially huge problems are. So I'll take the earnings that are in the pocket, for now, stay invested with diversification across asset classes, try to keep my wits about me, and hope for the best while trying to prepare for the worst.