According to author and renowned Yale Economics Professor Robert Shiller's most recent update of his version of the Fed Model, which uses cyclically adjusted earnings, stocks in the S&P 500 are looking fairly valued at current prices. This model has one great advantage, it removes cyclicality and the short term "noise" found in the market by using a ten year rolling average of S&P operating earnings. It is a fairly long data set so I have found it to be the best fundamental indicators of the broad market. Using this model toward the end of the 1990's bull run, would have very reliable signal that prices were becoming unsustainable.
That said, one major drawback of this methodology, is that it looks at the P/E yield in isolation, rather than comparing it with the opportunity cost of our funds, or interest rate yields. In the early 1980's stocks looked very cheap, but relative to the high-teen rates being earned in debt market, perhaps stocks would look less attractive. Currently interest rates are lower than long term historical averages so the 15.8x multiple on earnings that the S&P is trading at, actually may be much more more compelling when looked at relative to other places to park our cash.
