Do Valuations Still Matter?

Carl Swenlin looks at reported 2009 Q4 earnings for S&P 500 companies, and relates the current S&P value as of the start of Q2 2010 to historical norms. The resulting analysis shows that the Index, priced at 23.3 x trailing earnings, is 13% above historically overvalued territory, and some 35% over the “fair value” of 15x. The latter would bring us to around 767 on the index, as opposed to the 1200 level we’re seeing now. There are green shoots to be sure, but earnings will have to rise quite a bit this year in order to catch up to valuations.

Combined with the current technical overbought indicators, this fundamental indicator suggests caution for stock investors at this point. I know, I’m starting to sound like a broken record, but numerous studies show that long term stock returns depend on valuations – you gotta buy ‘em right, and they are too pricey at this point. Not being a short term trader, my takeaway is: I wouldn’t make any new stock buys until prices correct. Then we can see about buying at a bit of a discount.

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