S&P 500 Index: Soon To Be The Cheapest Since 1989

The recent swoon in the U.S. stock market has gotten to a point where there are plenty of values to be found for those investors willing to ignore the near-term headlines and negative sentiment. In fact, if things stay where they are for the next quarter or two, the S&P 500 index will be the cheapest it has been in more than 20 years (based on the current 2010 earnings estimate for the index of nearly $82). Below is a chart of the S&P 500’s trailing P/E ratio from December 31, 1988 through December 31, 2010 (the P/E for the next six months is an estimate based on current consensus profit expectation, assuming the market stays at today’s level).

Source: Standard and Poor’s Data

As of today we are at a P/E of about 14 (on this chart, the second to last notch on the x-axis). Assuming stock prices and earnings estimates remain where they are, the U.S. market would end 2010 at its cheapest level since 1989 (12.5 times trailing earnings). I know the headlines have been bleak over the last eight weeks or so, but stocks are quite cheap, especially given low interest rates and tame inflation.

If earnings season is pretty good this quarter (including in-line guidance for the second half of the year), as I expect it to be, I will very likely allocate some additional portfolio cash into the equity market. Although the market chatter is centered around the increased odds of a double-dip recession, it is important to note (as was pointed out on CNBC just this morning) that we have seen only 3 double-dip recessions over the last 150 years. Does that mean it is impossible we could get a fourth? Of course not, it just makes it probably a lot less likely than the U.S. equity market is currently indicating.