Ed Yardeni on valuation of SP500
>NOTE ON VALUATION & BEAUTY: A 5% Treasury yield implies that the fair value
P/E for the S&P 500 should be 20. The actual P/E (using 12-month forward
earnings) is down to 21-almost at fair value. In my Topical Study #49, "How
To Value Earnings Growth," (Jan. 31, 2000), I concluded:
"Valuation, like beauty, is in the eye of the beholder. This exercise has
demonstrated how widely valuation can vary with relatively small changes in
key variables. Valuation models are still useful for identifying the
assumptions about earnings growth and risk that are embodied in stock
prices. But, at the end of the day, we all have to judge on our own whether
those assumptions are overly bearish or overly bullish. In my judgment, the
overall market is probably fairly valued now. However, since the middle of
1998, the stock market has split into a small group of overpriced growth
stocks and a big group of underpriced value stocks. This year, I expect a
convergence of these valuation extremes."
Seasons Greetings,
Dr. Ed<
From an e-mail message yardeni.com
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