Stocks Are Cheap

...and that's exactly the point.

More and more I hear the phrase "stocks are cheap".

In a market dominated by institutional investors, why isn't the "smart money" (as they are fancifully called) buying the obviously cheap goods up for sale? Is it because cheap is about to get even cheaper once earnings season rolls around? Or is it just another case of the momo lemmings (a/k/a momentum driven fast money hedge funds and HFTs) following the price trend du jour?

The accompanying table* is the Capital IQ consensus numbers for each quarter for this and next year. Applying the forecasts to the current price of the S&P 500, the P/E ratio for year end 2012 (just 16 months away) sits at 10.27 times projected earnings and at 11.40 times next year's projected price (increased by 11%, the long term average return for large cap stocks). To put this in perspective, these are numbers that are well below the recent historical average P/E of 15.

With the 10 year US Treasury rate below 2% and corporate profits projected to grow at a fairly nice clip, what's stopping the "smart money" from stepping up to the plate?

*click image to enlarge