While some prominent strategists, including Jeremy Grantham and Robert Shiller, have pointed to the 10-year cyclically-adjusted price/earnings ratio (“CAPE”) as evidence that stocks (in particular the S&P 500) are very overvalued, Wharton Professor Jeremy Siegel says there’s a flaw in the metric.
The flaw, Siegel said at a TD Ameritrade Institutional conference, involves the 2008 year, Financial Advisor magazine reports. That year, three S&P members — Citigroup, AIG and Bank of America—lost a total of $450 billion, a big reason why the index’s components’ earnings fell 80% for the year. Siegel says that distorted the S&P figures — he says national income accounts indicate that U.S. corporate profits overall fell 25% in ’08, a big fall but not nearly as big as the S&P’s earnings decline.
Seigel also said he sees recent corporate profit growth as sustainable. He thinks the S&P 500 should rise to nearly 1,600 if inflation stays normal, and over 2,000 if we enter a low-inflation era.