S&P Trading 40% Above Historical Norms Based On Normalized Earnings -Hussman

This week's "Weekly Market Comment" by John Hussman titled "Misallocating Resources" is a good read. He is the President of Hussman Funds. Read the full report at their website. Below I quoted the paragraph where he talks about S&P valuation. He takes on the price-to-forward operating earnings valuation ratio that analysts use.

"On a valuation basis, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings. The disparity between our valuation assessment and the putative undervaluation being touted by Wall Street analysts is so great that a few remarks are in order. First, virtually every assessment that "stocks are cheap" here is based on the ratio of the S&P 500 to year-ahead operating earnings estimates, and often comes with a comparison of the resulting "earnings yield" with the depressed 10-year Treasury yield. What's fascinating about this is that this is the same basis on which analysts deemed stocks to be about 40% undervalued just prior to the 2007 top, following which the market plunged by more than half. There's a great deal of analysis regarding forward operating earnings that I published in 2007, but probably the most comprehensive piece was Long Term Evidence on the Fed Model and Forward Operating P/E Ratios from August 20, 2007."