AlphaNinja - The Dow is up almost 40% since the March low, yet the valuation on a P/E basis is nearly the same. (Yes I'm a Free-Cash-Flow-Yield investor, but I'll take a look at the P/E of the DJIA anyway)
Back on April 30th, the weighted DJIA Price to Earnings was 12.2, yet after this 40% run in the index the P/E has only crept up to 12.85 (based on 2010 earnings). The shifting weightings and help from Cisco and Travelers (added when GM and Citi were kicked out) are part of it, but so too are increased earnings estimates.
The average DJIA stock's eps(earnings per share) estimate has crept up .6% since 4/30/09, but exclude the bottom four stocks (BAC, PFE, GE, AA) that only account for 4% of the index and the estimates have risen 2%. Not huge, but important. When earnings estimates stop being revised down and turn higher, the PE multiple investors will pay for a stock often rises.
My favorite metric, FCFY (Free Cash Flow Yield), is an estimated 8.5% for the average DJIA stock, down from 10% or so a few months back. Most of these companies can access debt for much cheaper than 8.5%, so I see room for this yield to be lower -->> meaning the shares can trade higher.
The dividend yield is a healthy 3% for the DJIA - although down from 3.5% a few months ago, because dividends are not at volatile as earnings estimates.
Some of the DJIA stocks have extremely depressed earnings estimates, which could rebound sharply. Cost cutting during this recession could also lead to higher margins (yet lower employment) as we exit it. I definitely have a negative view of the economy going forward, but the DJIA could add another 1500 points and still offer a nice Free Cash Flow Yield.