current market valuations

At current levels, the market is trading about 13 times trailing operating earnings. While below the 16.7 median level since 1972, the operating P/E ratio is still well above the 6 times earnings seen in the early 1980s. Granted, the lower current interest rate environment does argue for higher P/E ratios — albeit with a wide historic dispersion. Considering current interest rates, the earnings yield of the S&P 500 (E/P, the inverse of P/E) is relatively attractive on a trailing operating basis. The forward P/E ratio has pushed lower and now stands at about 9 times expected earnings over the next four quarters, and the forward earnings yield is very attractive relative to Moody’s Baa corporate yields.

It’s also important to remember that valuations based on forward earnings were attractive heading into the crash. And, again, it is increasingly difficult to reconcile a rebound in earnings with the ongoing economic slowdown in the U.S. and deteriorating conditions abroad. Nevertheless, the market appears to have priced in a fairly deep recession. And barring a significant near-term rise in interest rates (which we don’t foresee unless there is a disorderly decline in the dollar) or depression (which we also consider unlikely), current market valuations may increasingly become a compelling offset to the ongoing liquidation in the market.