Dow Jones valuations

Today the Dow Jones Industrial Average (DJIA) closed at a record high of 17,068.  The valuation of the DJIA is probably at fair value assuming forecasted earnings estimates.  Watch for trouble if earnings miss expectations this month.

The concern is, if the market is fairly priced, what drives the indexes higher from here?  Real consumer spending has declined two months in a row [this is supposedly when the economy is recovering from a contraction of 2.9% in Q1 due to “bad weather”].

Of the 30 DJIA stocks, 18 have Price Earnings ratios (PE) of 16 or better.  Some of the higher valuations can be justified:  Disney with a PE of 22, expected to grow 25% this year with a three year average growth of 18%.  Boeing with a PE of 22, expected to grow 31% this year with a three year average growth of 11%.  These companies are clearly moving in the right direction.

Home Depot and Visa, have nice double digit growth rates, but at a slowing pace.

P&G and McDonalds have low single digit growth forecasted and Coke has none- yet each tout PE valuations of 19, 18, and 21 (respectively).  These are extremely high valuations for such trivial growth expectations and in the case of Coke, no expected growth at all.

Top line sales continue to be a problem throughout this recovery.  DJIA revenue for the second quarter is forecasted at only 1.8%.  The question lingers, how long can companies boost earnings relying solely on cost cutting and stock repurchase programs?

Article written by