Our long run valuation indicator ( which we publish for the S&P500) has got a little bit more expensive since Jan and Feb, as of 31 March it is slowing a slight richness, but certainly not flashing danger signals.
One of the key inputs is expected earnings over the next two 12 month periods, this data is sourced form the Bloomberg survey of stock analysts. Currently earnings growth over the next 12 months is expected to be 5.0%, and for the following 12 months, 8.0%. After a few heroic assumptions, we estimate that with no change in the current P/E ratio we could expect a return of 8.7% per annum over the next two years. There is a little bit of science, but quite a lot of art to this type of estimate. Clearly, any estimate will be wrong, but a formal process of looking at estimates in the same objective fashion does provide a helpful discipline on our thinking. If growth continues as expected, if earnings grow as expected and if many other things we have/have not though of, then the S&P is not significantly over-valued.