A rebound in corporate profits coupled with more than $2.3 trillion in Fed stimulus have pushed investors back into equities, sending the Dow up more than 116% from its March 2009 low of 6,547.05. The Standard & Poor’s 500 Index is less than 3% below its record, reached the same day as the Dow.
The Dow surpassed its dot-com-era record on Oct. 3, 2006, 81 months after it peaked in January 2000. The measure had tumbled 38% from the 2000 high of 11,722.98 to its bottom on Oct. 9, 2002, as the Internet boom collapsed.
The gauge on average has taken about 6 1/2 years to return to previous record levels, according to data compiled by Bloomberg. Should the measure have followed that path, the Dow wouldn’t have posted a new record until the middle of 2014.
Dow profits are projected by analysts to increase 9.2% this year and 9% next year. Profit from companies in the S&P 500 will exceed $120 a share by next year, double the level in 2008, according to Wall Street estimates. That’s the biggest increase since the 142% gain amid the rally in technology stocks from 1993 to 1999.
The expansion in the Dow’s valuation since March 2009 has been slower than the S&P 500’s, while both are cheaper than 2007. The Dow’s trading at 13.8 times earnings in the last year, compared with a multiple of 17.1 at its 2007 peak and 25.9 when it reached a record in January 2000. The S&P 500’s multiple is about 15 times profit, compared with 17.5 on Oct. 9, 2007.
The operating margin, a measure of profitability, for S&P 500 companies is 19.9% after reaching 20.7% in August, the highest level in Bloomberg data going back to 1998.
“In many ways, the valuations on this market look more attractive because the profit margins that we’ve seen are outstanding,” said Hayes Miller, who helps oversee about $48 billion as the Boston-based head of asset allocation in North America at Baring Asset Management Inc. “Companies have found ways to cut costs and raise productivity levels,” he said. “It’s an argument to the idea that what happened in 2008 won’t occur in 2013. Equities are now fair-valued versus expensive, which they were in 2007.”
U.S. stocks have rallied this year as fourth-quarter earnings beat estimates and lawmakers reached a compromise on taxes, avoiding the so-called fiscal cliff that would have drained more than $600 billion from the economy.
The Dow has climbed more than 17% since last year’s June low as Fed Chairman Ben S. Bernanke pledged the central bank will buy $85 billion of mortgage and Treasury securities a month until the labor market recovers. Minutes from the Federal Open Market Committee’s January meeting showed policy makers were divided about Bernanke’s program of buying bonds. The U.S. unemployment rate has fallen to 7.9% from 10% in 2009.