Valuation {03.12.13}

With the S&P 500 near all time highs {the Dow's already surpassed it's older higher notches}, it's time to step back and take a look at valuation.

The S&P 500 is up just slightly under 10% for the year closing last night at 1550.  Using our $106.50 year end 2013 estimates for the index it currently trades with a 14.55 PE and a 6.8% earnings yield. A 15 multiple on our earnings estimates yields a price target of roughly 1,600 on the index.  Our year end price estimate based on our $106.50 earnings estimate is S&P 500 1,625.  We are about 5% lower than that right now.

Current Wall Street estimates for the end of this year on the S&P range between 108-112.  If we take a mid-point of those estimates then stocks currently trade with a 14 PE and a 7% earnings yield based on those year end numbers.  A 15 PE on 110 in earnings equates to a year end stock valuation of 1,650.

So far this year stocks trade in a pattern similar to last year when they broke fast and hard higher out of the gate, gaining about 8% by this time in 2012.  If stocks trade in the same pattern then they would top out in the next few weeks and ultimately give some of these gains back between now and early summer.  There is no guarantee or reason to suggest that stocks must trade in the exact same way as last year.  However I will note that we are statistically much closer to the six month period of market weakness that typically exists between April and sometime in the early fall.  Stocks are also very over bought right now.

The one wild card would be if the politicians in Washington are able to cobble together some grand bargain regarding the budget, the deficit and taxes.  If that gets done then stocks have a much higher probability of shooting much higher than most of us currently anticipate.

*Long ETFs related to the S&P 500 in client accounts.  Long ETFs related to the Dow Jones Industrial Average in certain client accounts.