Jeremy Siegel: Stocks Are Undervalued; Don't Count On an Earnings Bust

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Apple trades at just 11.3 times forward earnings. Microsoft, 9.9 times earnings. Johnson & Johnson, about 12 times earnings. Hewlett-Packard, a depressing 6.3 times earnings.

The S&P 500 index trades at about 12 times earnings -- a below-average reading historically.

Stocks look cheap.

But are they? Some say earnings are unsustainably high, due for a drop that could make what look like good buys today bargain traps tomorrow. For example, Yale economist Robert Shiller measures stock valuations by taking the average of 10 years' earnings adjusted for inflation -- a process called the cyclically adjusted P/E ratio, or CAPE. It shows that stocks may in fact be overvalued at current prices.

Wharton professor Jeremy Siegel doesn't buy it. He thinks broad indexes like the Dow Jones Industrial Average (INDEX: ^DJI) and the S&P 500 (INDEX: ^GSPC) are as much as 25% undervalued and says fears that earnings are unsustainably high are overblown. Check out why in this video from our conversation in December:

What do you think? Share your thoughts in the comment section below.

Be sure to check out our brand-new free report:"The Stocks Only the Smartest Investors Are Buying."It details a company Warren Buffett would probably be interested in if he could still invest in small companies.

At the time this article was published Fool contributorMorgan Houselowns shares of Microsoft and Johnson & Johnson. Follow him on Twitter, where ho goes by@TMFHousel.The Motley Fool owns shares of Apple, Johnson & Johnson, and Microsoft. Motley Fool newsletter serviceshave recommended buying shares of Apple, Johnson & Johnson, and Microsoft, creating a diagonal call position in Johnson & Johnson, and creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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