Rosenberg: S&P 500 Overvalued by 26 Percent

Wednesday, 10 Mar 2010 04:43 PM

By Dan Weil

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Star economist David Rosenberg is sticking to his guns that the economy and the stock market are in trouble.

He wrote in a letter to clients of his firm Gluskin Sheff + Associates that some of them say he’s too bearish, and other believe he’s changing his views when he mentions positive news.

“I am not changing my macro or market view, but merely providing some color on why it is that the equity market refuses to go down even in the face of what has been a slate of disappointing economic news over the course of the past month,” Rosenberg wrote, according to the Financial Times.

Stocks aren’t falling yet because of rising dividends, stock buybacks and merger and acquisition activity, he maintains. “But that’s no reason to capitulate,” Rosenberg wrote.

“If there was an impediment, in addition to a murky economic outlook, it is valuation. There were revisions to the Shiller valuation data and the latest reading on the normalized real P/E (price-earnings) multiple is 20.64, up from the 20.0 in February and 20.5 in January.”

With a long-term trend of 16.36, that suggests the Standard & Poor’s 500 Index is overvalued by 26 percent, Rosenberg says. The S&P 500 recently traded at about 1,146.

Investment guru Mark Faber thinks stocks are overvalued too.

“If we do (make a new high), I don’t think it will be that far – maybe 1,200. And then I wouldn’t rule out a correction of at least 20 percent,” he told Bloomberg.




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