"...VALUATION—-In addition, don’t believe the story that stocks are cheap. This misconception is based on the year-ahead forecasts of S&P 500 operating earnings. The use of operating earnings is a contrivance that began in the mid to late 1980s to make earnings look better than the reported earnings according to generally accepted accounting policy (GAAP). Prior to the bubble period that began in the late 1990s the S&P 500 sold at an average P/E of about 15 with a range of 22 to 7 going back 1926. Based on our 2010 trendline GAAP earnings of about $65 the S&P 500 is now at 18.2 times the average and far closer to the top of the range than the bottom. Secular bear markets have typically bottomed at 7 to 10 times earnings. Similar calculations by Robert Shiller and John Hussman indicate even higher valuations..."
at http://pragcap.com/5-reasons-stock-market-vulnerable
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