Nov. 2006 valuation update for Large-Cap US Stocks
Today's close for the S&P 500 at a six year high of 1393.22 calls loudly for a long overdue update to the Valuation Spreadsheet.
Let's look at price-to-earnings ratios for that index and note that the P/E ratio for 2006 earnings of 16.35 is a bit beyond the average P/E of 15.38 that the index has turned in since 1935. So large-cap stocks seem to be edging toward the pricy side. But if we look at earnings estimates for 2007, a P/E ratio of 15.34 is produced, so large-cap US stocks still seem decently priced.
This simple P/E-comparison method of stock valuation is just that: simple. More sophisticated schemes are used by the likes of the bullish Jeremy Siegel, who compares a variety of earnings metrics to a variety of bond yields and still finds US stocks undervalued. His perennial counterpart on the bearish side, Robert Shiller, uses a "10-year smoothed" trailing P/E and finds shocking overvaluation still baked into the US stock cake.
For the finance dilettante typing this, simpler is better. I think stocks are possibly a little overvalued at this point, after a period of undervaluation, during which it was very good to be on the buying side. And even with stocks a little overvalued, I am comfortable continuing to dollar-cost average into my array of stock index funds for the foreseeable future.