Sophisticated models point to decline in stocks

As for the overall U.S. equity market, our propriety fair-value model moved down to 1,050 in the past month from 1,070, with regard to the S&P 500. The range is 1,000 to 1,120 so the index has moved above the top end of the band. This suggests an overvaluation of around 10% — the last time it was this overvalued was late last year; the Shiller normalized P/E ratio is now pointing towards a near-30% degree of overvaluation; a Tobin-Q model that looks at replacement-historical costs indicates a 20% level of overvaluation. In a nutshell, this market is no bargain at today’s prices. What stood out in the past month was that the stock market surged even as analysts cut their EPS forecasts, generating P/E expansion, presumably on QE2 hopes.---ibid