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Table: Clouded Crystal Balls


What some common valuation models used by Wall Street show:

FED MODEL

Calculates an "earnings yield" by dividing expected company earnings by the S&P 500 index and comparing that to the yield of 10-year Treasury notes.

Market is 13% undervalued

DIVIDEND-DISCOUNT MODEL

More elaborate version of the Fed model. Analysts create proprietary formulas and plug in multiple factors, including their estimates of gross domestic product and earnings growth.

Market is 15% undervalued

PRICE-TO-BOOK

Compares total market value of companies with the net worth reported on their balance sheets.

Market is 30% to 40% overvalued

P-E RATIO

Divides stock prices by reported or forecast earnings. Resulting number implies how many years investors must wait before the company earns what they paid for its stock

Market is 25% overvalued, based on an average p-e of 15 over the past 70 years

Data: BusinessWeek, Standard & Poor's Corp., Smithers & Co., Yardeni.com


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