Valuation of the S&P 500

I constantly hear the bears in the market stating that the market is still overvalued.  They point to the fact that earnings for the S&P 500 will probably come in at around $45.  That leaves us with a P/E of around 17.  To the naked eye that does seem overvalued because most believe that a P/E of 17 is expensive when the economy is in free fall.  However, the successful investor sees opportunity in these numbers.

The investors that beat the market continuously might look at these valuations and see the glass half full.  Although earnings for this year will be terrible, eventually the market will recover and things will begin to improve.  Therefore, we like to use normalized earnings, which means how earnings generally are in a normal investing environment.  Basically an environment similar to that of Goldilocks and the 3 Bears.  The porridge is not too hot and not too cold.  In normal economic conditions, the S&P 500 will probably clock in around $100 in earnings. (rather then the $45 that the S&P will probably report)  That leaves us with the S&P having a P/E of 8 rather then the current P/E of around 17.  Now the market looks dirt cheap.  That means that the average company in the S&P is probably trading at around 8 times normalized earnings.   Call me crazy, but at 8 times earnings i'm going to be buying as much stock as I can get my greedy hands on.