Dow at 20,000 still looks cheap considering earnings growth likely ahead, strategists say

A trader wearing a Dow 20,000 hat works on the floor of the New York Stock Exchange.
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As the Dow Jones industrial average reached the 20,000 milestone Wednesday, Wall Street is getting increasingly optimistic the market can grow into its above-average valuation due to Donald Trump's pro-growth economic agenda.

Let's take a look at the market's valuation metrics.

S&P 500 forward PE ratio chart

Source: FactSet

The market is trading at 17.1 times the next 12-month earnings estimate, which is slightly above the average since 1999.

More worrisome is another well-known valuation method called the "cyclically adjusted price-to-earnings ratio" (CAPE). It is calculated using price divided by the index's average historical 10-year earnings, adjusted for inflation.

Yale economics professor Robert Shiller's research found future 10-year stock market returns were negatively correlated to high CAPE ratio readings on a relative basis.

Shiller CAPE PE Ratio Chart


The CAPE ratio is currently 28.4, which is its highest level except for the time periods right before dot-com bubble burst and late 1920s market crash.

Leuthold Group's Doug Ramsey notes that the 's trailing price-earnings ratio is in the 90th percentile level since 1920. But he isn't worried ... yet.

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