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It is not expensive either, but I'm hearing from the bulls that with the recent sell-off in the market - a staggering 6% - stocks are getting inexpensive.

The S&P 500 is trading at 13.7x 2008 earnings. That looks like a fair bargain, but things are not all what they seem. A breakdown of the market by sectors paints a different story.

GIC sector valuations on 2008 estimates:

Consumer Discretionary 15.7x
Consumer Staples 15.9x
Energy 11.4x
Financials 10.2x
Health care 14.6x
Industrials 15.0x
Materials 14.4x
Tech 17.9x
Telecom 14.2x
Utilities 15.0x

Energy and financials combined 10.6x
The market excluding energy and financials 15.7x
Excluding implied financials 16.4x.

Implied financials are the captive financial companies of corporations not classified as financials in the GICS classification, i.e. GMAC, GE Money, etc.

Not too bad, but not cheap.

The market, however, is trading at 15.3x estimated 2007 estimates. If you exclude financials and energy, the market is trading at 18.0x 2007 estimates, and 19.0x excluding implied financials. Energy and financials are cheap - if you believe estimates will not come down. The rest of the market is expensive.

Financials are projected to be 26% of 2008 profits. Since implied financials account for another 8%-10% (I assume 8%), then total financial profits account for about a third of all market profits. Energy is projected to be 13% of profits next year. Together, financials and energy are expected to account for nearly half of all corporate profits.

Analysts are forecasting 10% profit growth for the market in 2008.

Expected profit growth by GIC sector:

Consumer Discretionary 23%
Consumer Staples 8%
Energy -1%
Financials 2%
Health care 36%
Industrials 8%
Materials 4%
Tech 15%
Telecom 32%
Utilities 12%

Energy and financials combined 1%
The market excluding energy and financials 17%
Excluding implied financials 19%.

Nineteen percent profit growth for the market excluding energy, and financials is quite a heroic assumption, especially after extraordinary profit growth the past five years.

Source: Playing the Stock Market: It's Not Cheap