U.S. Stock Valuation Update, September 2006
Interesting that in the months that have intervened since I last updated the S&P 500 valuation spreadsheet the price level of that index of US stocks has risen from around 1250 to over 1300. One might ask then, are US stocks still a decent value?
Oddly the value appears even better than it did back in June due to a couple of factors: increased corporate earnings have kept the index's price-to-earnings ratio below the historical average (and well below the average of the past 10 years), and bond yields have sunk, making investments to most fixed income instruments far less attractive than investments in a broad index of stocks, at least to those who would compare conventional return prospects for those two asset classes.
What's more, the shrinkage of the gap between "as reported" corporate earnings and Standard & Poors' very strict measure of "core" earnings implies that investors are getting more for their money in terms of the top-line earnings numbers. Nice to see corporate earnings reports tightening to standards.
The Fed meets next week and it seems unlikely that they will raise short-term interest rates given the recent relative weakness in both commodity prices and economic data. The rest of the year could be good for U.S. stocks.