Feb 2007 US Stock Valuation Update - Things Still Look Fair
Mr. Broken Record here, with his updated US Stock Valuation Worksheet: I know the yellers on CNBC and elsewhere keep calling for a correction, but the current US large-cap stock valuations still look quite reasonable by historical standards.
Today the S&P 500 closed at 1451.19. Assuming a fairly conservative ("as reported") estimate of aggregate earnings of $92.25 for the index, that gives us a Price-to-Earnings (P/E) ratio of 15.73, right in line with the historical average of 15.68 since 1935.
Say we get a little harsher in evaluating earnings, and go with an S&P "core" earnings estimate of $85.70 for 2007. We're still looking at at P/E ratio of 16.93 for the year, still quite reasonable, especially in a period of modest inflation and low interest rates.
Project the high quality of "core" earnings to trailing 12-months earnings measures, and the P/E creeps up a bit to 18.16. Sorry, but that's still not a bad P to be paying for all that E. Bob Shiller would surely disagree, given that he likes to calculate his P/E based on 10-year trailing "smoothed" earnings, but Ed Yardeni would point out that investors don't discount the past, they discount the future.
US large-cap stocks still look reasonably priced at this date. I'm squinting really hard, but I can't see a bubble there (though I can certainly still see bubbles in plenty of neighborhoods in bond world - sorry, is that mixing metaphors?). A correction may come, but it would represent, more than anything else, a buying opportunity.