The stock market's surge ended in October. After seven months of gains the Standard & Poor's 500-stock index closed at 1036.18 Oct. 30, down 2% for the month. Investors are left to ponder whether this is a pause or prelude to a deeper dive. In other words: Is the market overvalued or undervalued? As these experts show in their analysis of the market's price-earnings ratio, the answer depends on whether you're looking back or looking ahead.

THE S&P 500: ROOM TO RUNDavid Bianco

Chief U.S. Equity Strategist, Bank of America Merrill Lynch

S&P 500 Fair Value: 1150

Forget the past, says Bianco. Current corporate profits remain beaten down and reflect an economy in crisis. Calculations using "normalized trailing earnings"—an average of past results over a 10-year period—reflect the economy as it was, not as it will be. The market looks forward, and investors should, too. While analyst predictions are imperfect, Bianco argues that consensus earnings estimates give the best sense of where the market believes corporate profits are headed.

Using current earnings expectations of $70 per share for the S&P 500 in 2010 implies the market should peak around 1050. The economy is expected to be sluggish next year, and corporate profits won't recover until 2011, when consensus earnings estimates for the S&P 500 are $80. "But what if 2010 were normal?" asks Bianco. To see what that would look like, he subtracts the 6% real return investors expect of stocks from $80. That suggests earnings would come in around $76, and that the S&P 500 trades at a price-earnings ratio of 13.9. Bianco thinks that's too low. The market should trade with a p-e of about 16, based on expectations of a 6% real return. He predicts the S&P will finish the year at 1100 and hit 1200 by mid-2010. "The economy and earnings are supportive of the market," he says. "I don't see a big pullback."

THE S&P 500: HITTING A WALLDavid Rosenberg

Chief Economist & Strategist, Gluskin Sheff

S&P 500 Fair Value: 875

True, looking over your shoulder is not a perfect way to value the market, says Rosenberg of wealth-management firm Gluskin Sheff. During a recession, companies struggle to turn a profit and price-to-earnings ratios tend to balloon. But at least those figures are real. Earnings expectations are just a best guess and usually wrong. And right now, estimates are all over the place, making them more unreliable than usual.

So despite the ailing economy, Rosenberg uses current earnings to compute the market's p-e. That leads him to believe the market is overvalued, since it puts the market's p-e at 27.6 times operating earnings. That's way above where it usually is, in the mid-teens. And the p-e has been higher only 2% of the time since 1960. It is also inflated relative to where it's been at the end of other recessions. In 1991, the p-e on the S&P 500 was 17.2; in 1961 it was 20.5.

Rosenberg believes that the stock market is already pricing in an economy running at full strength, with gross domestic product growing 3% to 4%, rather than one with profits typical of the middle of a recovery and GDP growth at 1% to 2%. Analysts predict S&P 500 earnings of $80 in 2011, twice the level of profits when the S&P bottomed in March. Historically it has taken four to five years following a recession for that to happen. "Either the fundamentals have to catch up with price or price has to catch up with the fundamentals," says Rosenberg. "If we correct to 900, I would be rubbing my hands and licking my lips."

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