Are Stock ETFs Still Cheap After Rally?

March 9th at 12:00pm by Tom Lydon

The economy is improving and corporations are generating better earnings, but U.S. equities and stock exchange traded funds still show relatively depressed valuations, according to bullish analysts.

Rising income has brought the price-to-earnings ratio on the S&P 500 to around 14.1 from its last peak of 15.4 in April, according to InvestmentNews. Valuations are trailing the five-decade average of 16.4 for the longest period since the 13-year period starting in 1973. [Are Stock ETFs Replaying the 1998 Russian Debt Crisis?]

SPDR S&P 500 (NYSEArca: SPY) currently shows a P/E ratio of 14.7. [ETF Spotlight: SPDR S&P 500]

“The powerful recovery in earnings thus far has allowed market averages to rise without pushing the P/E higher,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in the article. “Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn.”

Despite the S&P 500′s best January performance in 15 years, exchange trading volume is at its lowest since 1999 as the slow economic growth has kept investors from jumping on earnings.

Corporate profits have consistently topped analyst expectations for 12 straight months, and analysts now believe that companies in the S&P will see earnings rise to $104.40 a share this year, a 70% increase from 2009 and a record high.

“The world is profoundly underinvested in U.S. equities,” Jeffrey Saut, chief investment strategist at Raymond James & Associates, said in the article. “The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen.”

SPDR S&P 500

For more information on the U.S. markets, visit our S&P 500 category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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