I do not believe that the market is significantly overvalued as some have suggested. My analysis suggests that the market is actually either slightly overvalued or near fair value from a historical standpoint.
According to Bespoke Investment Group, the average reading of the price/earnings ratio (P/E) of the S&P 500 for the time period starting in 1989 and ending in 2014 was 18.90. Looking at a shorter timeframe, the P/E of the S&P 500 for the time period starting in 2004 and ending in 2014 was 16.95. The S&P 500 closed 2014 at 2,059 with a consensus earnings estimate for the year of 117.02. This equates to a P/E of 17.6, just slightly above the 10-year average of 16.95 but below the 25-year average of 18.9.
Looking forward, the median forecast of Wall Street strategists for 2015 S&P 500 earnings and the closing price of the S&P 500 are $126 and 2,213 respectively according to Business Insider. This equates to a median forecasted P/E of 17.6 for 2015, which interestingly is the same level where it is expected to be at the end of 2014. Hence, valuations are not currently anticipated to become richer, or cheaper, over the course of the New Year and are arguably reasonable from a historical perspective.