Valuation {06.19.12}

The S&P 500 last night closed at 1334.78.  At that price level the index trades at 12.86 times my $103.75 earnings estimate and carries a 7.78% earnings yield.  The index also carries a dividend yield of just a bit over 2%.  This yield by the way beats something like have the dividends of all the individual stocks in the index.  

Using the consensus estimate of Wall Street which is around $105, the index trades 12.71 times the estimate and a dividend yield of nearly 7.9%.

Per Bloomberg, the US 2 year treasury yields 0.28% and the US 10 year yields 1.60%.  The German 10 year yields 1.51% and for comparisons sake the Greek 10 year yields 25.23%.

If the market would accord US stocks a historic multiple range between 14-16 times my 2012 estimate  then the S&P 500 would be worth between 1452 and 1660.  Its earnings yield would still be historically high at just a bit over 7% at the low end and 6.25% at the high end of my estimated range.  Stocks on valuation alone are undervalued by 8-24%

If the market would accord US stocks a historic multiple range between 14-16 times using that $105 Wall Street consensus estimate then the S&P 500 would be worth between 1470 and 1680.  Its earnings yield would still be historically high at just a bit under 7% at the low end and 6.125% at the high end of my estimated range.  Stocks on valuation alone on consensus numbers are undervalued by 10-26%

The dividend yield at those levels would still be competitive with the current yield of the US 10 year treasury.

Stocks either discount all the fear that's out there regarding the global economy, discount a potentially disruptive event to world economic growth such as a war or natural disaster or act as if the US has the potential to enter a recession in the next 6-12 months.  The current economic data does not support a recessionary view although it is indicative of a slow growth economy.

The potential for these gains is based on earnings for the end of 2012.  That is a bit over six months out.  Taking those estimates out until mid-year 2013 shows a much significantly higher valuation potential for the markets.

NEVER IN MY INVESTMENT CAREER {now spanning over a quarter of a century} HAVE I SEEN STOCK VALUATIONS THIS CHEAP BASED ON HISTORIC PE LEVELS  AND ABSENT A RECESSION OR A SIGNIFICANT ECONOMIC CONTRACTION!!!!  Either we are going to have an event that provides a significant hit to growth or stocks are presenting a buying opportunity of a generation for longer term investors.

*Long ETFs related to the S&P 500 in client and personal accounts.