From a valuation perspective, Wall Street is estimating stocks on next year’s estimated earnings to be as cheap as we’ve seen only two times in the past 26 years.
You can see where stocks were valued on the S&P going into 2012. Stocks finished up 16% that year. The other year was 1995 (a P/E of 14.89). Stocks finished that year up 37.6%.
Still, many have continued to harp on valuation, always pointing to the long run average P/E on stocks, which is around 16. That’s a long history. If we look back at the past twenty years, the average valuation is MUCH, MUCH higher. It’s 23 times earnings!
If we take Wall Street’s estimate on S&P 500 earnings of $176 and multiply it by 23, we get and S&P at 4,048. That’s 47% higher than Friday’s close.
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