Why the S&P is too cyclical to be cheap

The S&P's recent weakness has led many commentators to argue that it looks outstandingly cheap. But it may not be such a bargain after all.

It's been a mixed few weeks for the major US indices. Even after the recent turmoil, the Dow Jones Industrial Average is still up around 2% since the start of the year, while the S&P 500 is slightly down. The Nasdaq Composite has slumped to its lowest level in 13 months after a string of poor earnings reports from technology companies.

The relative performances of the Dow and the Nasdaq are understandable. After all, in these troubled times, investors are choosing to put their money into sturdy old-economy companies and avoiding risky tech stocks. True, some of those Dow stalwarts look less than sound themselves take a bow Ford and GM but who ever said that markets were rational? However, the S&P's weakness has seen many commentators arguing that it now looks outstandingly cheap. The index trades on a forward p/e ratio of around 14, which is far too low at a time when non-tech earnings growth remains extremely strong, say the bulls.

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