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TheStreet Open House

As The Dow Breaks 15,000, Is It Too Late To Buy?

If you look at earnings from the past year, the S&P 500 is trading at 15.6. That is slightly lower, or cheaper, than the 17.2 average for this P/E since World War II, according to S&P Capital IQ.

Using forecast earnings for the next 12 months, you get a P/E of 14.2, the same as the average over ten years, according to FactSet, a provider of financial data.

Another measure shows stocks are somewhat expensive, however.

Some investors think you should look at annual earnings averaged over 10 years instead of just one year. This eliminates any surge or fall due to changes in the business cycle. Dividing stock prices by a 10-year average of earnings yields a P/E of 23 times. That is higher, or more expensive, than the average 18.3 since WWII.

A word of warning: You shouldn't invest just by looking at P/Es. They are more guide than gospel. There have been long periods when stocks traded at lower or higher P/Es than the averages.

â¿¿ ECONOMIC EXPANSION: With Friday's job report, the odds for continued expansion got better. The economy has created an average of 208,000 jobs a month from November through April, above the 138,000 average for the previous six months.

The report follows news that the pace of economic growth picked up in the first three months of this year, home prices rose at the fastest pace in nearly seven years and automakers had their highest sales for April since the recession.

Tally it up, and financial analysts see earnings for the S&P 500 rising 12 percent in the last three months of the year, a big jump from an estimated 4.8 percent gain in the first three months.

There's plenty of reason for caution, though.

For starters, analysts tend to overestimate earnings several quarters in the future, and may be doing that again. Early last year, they expected a 13-percent jump in earnings in the last three months of the year. They got four percent instead.

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