If you think the market is cheap after Wednesday's big swoon, think again.

While there's little doubt that valuations have moved lower recently -- full-year profit estimates for the

S&P 500

have risen by almost 3 percentage points since the start of 2004, and the




have now slipped into negative territory for the year -- a number of analysts say the market is still too expensive.

The S&P 500 now trades at less than 18 times its full-year 2004 forward earnings estimates, while the Nasdaq trades at 33 times forward estimates, according to


. At first glance, these numbers might seem reasonable. They're certainly well below bubble-era valuations, and some pundits say they are justified by strong profit growth this year. S&P 500 earnings are slated to rise 15.6% in 2004.

Still, a number of analysts worry that these earnings estimates are too optimistic. Smith Barney analyst Tobias Levkovich said profit margins, which are currently very high, could be crimped as the labor market starts to improve and wages and benefit costs go up.

"We are not suggesting that earnings growth will not continue," he said. "However, we do believe that expectations for earnings might be a tad aggressive as we look into the future."

Others note that an inevitable hike in interest rates will hurt earnings, as borrowing costs rise and consumer demand for items such as homes and cars declines.

Meanwhile, some analysts worry about the effect on earnings from a possible revaluation of the Chinese yuan. Premier Wen Jiabao said Tuesday that the country plans to cool its fast-growing economy. Any revaluation of the yuan -- which is currently pegged to the dollar and considered undervalued -- could hurt profit margins at companies like


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Home Depot

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, which purchase a lot of goods from China.

In addition, while earnings are currently expected to be strong in 2004 -- possibly hitting a record in dollar terms -- analysts agree that the pace of growth will probably decelerate throughout the year, and that is a worrying sign, particularly for next year. According to Thomson First Call, profits will rise 25% in the first quarter, 20% in the second, 12.3% in the third and 14.1% in the fourth quarter.

Francois Trahan, chief investment officer at Bear Stearns, said investors realize that first-quarter profit growth won't be repeated in subsequent quarters, and said that is why the market hasn't responded to the good news recently. "It will be difficult for earnings to get much better than this," he said.

Back in 2002, many analysts insisted that price-to-earnings multiples were artificially high because earnings were "cyclically depressed." Now that earnings are considered to be at peak levels, some pundits say P/Es are artificially low.

"It's crazy that we talk about

the market's 'value' changing based on short-term earnings ups and downs," said Cliff Asness, managing principal at AQR Capital.

In measuring how cheap or expensive the market is today, Asness looks at the current price and divides it by average annual earnings over the past 10 years. This valuation method, made popular by Yale professor Robert Shiller, smooths out the cyclicality of earnings that is due to recessions and recoveries. On this basis, Asness said, the market is currently trading at 27 times earnings compared with a 28-year median of 16.9.

Even on the basis of forward operating earnings, however, Asness said the market looks expensive compared with where it has traded historically. He noted that since 1976, the median P/E based on forecasted operating earnings has been 12.1, "so the recent figure of 17.7 is indicating that stocks are not a little, but a lot, more expensive than the norm for the last 28 years."

What's more, he said, the 1976 to 2003 period was uniquely characterized by higher-than-normal valuations. A true long-term median P/E based on forecasted earnings should be closer to 11, he argued.

Analysts who say the market is cheap are often comparing the forward P/E of today with the trailing P/E of yesteryear. Asness says that is like comparing apples and oranges.

Seth Scholar, senior research analyst at Sand Hill Advisors, said that while many sectors are overvalued -- the semiconductor group, in particular -- a few areas are more reasonably priced. "We haven't seen valuations this low on, for example, large-cap pharma for a long time," he said.

As for the overall market, however, Scholar said investors have priced in good earnings news for this year and are already looking ahead to 2005. "It's hard to say how good earnings will be next year," he said. "But that's clearly a fear."