*“The majority are looking for 2014 S&P 500 operating earnings of $120, resulting in a P/E of 14.8, supposedly in line with past norms. However, the long-term P/E average of about 15 is based on reported (GAAP) trailing earnings rather than forward-looking operating earnings. Profit margins are about 70% above the long-term average, and are likely to return to the mean. As calculated by Ned Davis Research, cyclically smoothed earnings for 2014 are about $81, resulting in a P/E of 21.9, a full 46% higher than the long-term average. We note, too, that the forward-looking P/E in late 2007 was about the same as it is now.”* (Comstock Partners)

January 13, 2014:

*“Current valuation of S&P 500 is lofty by almost any measure. (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings. At 15.9x, forward P/E of S&P 500 is high by historical standards. The forward P/E ratio for the S&P 500 during the past 5-year, 10-year, and 35-year periods has averaged 13.2x, 14.1x, and 13.0x, respectively. Historical distribution of P/E ratios clearly highlights that outside of Tech Bubble, S&P 500 has only rarely (5% of the time) traded at current forward multiple of 16x.”* (Goldman Sachs)

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