The Dow Jones industrial average is on a tear with the rest of the stock
market, but valuations on stock prices are still reasonable.
In a new report, research firm S&P Capital IQ argues that stocks are still
fairly valued even though share prices lately have surged far faster than
underlying corporate earnings.
"Market valuations are appealing but not compelling," Sam Stovall, the firm's
chief equity strategist, concludes in the report.
That's welcome news Tuesday, as the Dow Jones industrial average has jumped past
15,000 in early trading, part of a powerful rally that has sent stocks nearly
straight up over most of the last six months.
Judged by operating earnings, the Standard & Poor's 500 index opened the week
roughly 11% below its average 12-month price-earnings ratio since 2000,
according to Stovall. If the index were fully priced, it would be trading at
roughly 1820, the report said, rather than the current 1621.
The story is similar based on other P/E measures, including trailing earnings,
according to the report.
"Surely, the market has gotten ahead of itself, many say, and is ripe for
correction due to overvaluation," Stovall wrote. "We, however, think that while
valuations are no longer as compelling as they were just a year ago, they remain
appealing."
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