S&P 500 is cheap, and could hit 2,000

I'm not given to optimistic predictions but the S&P 500 is trading a low P/E relative to where it was at the dot-com peak. The reason is that individual investors, still burned by the dot-com collapse, have been on the sidelines. However, daily record closes in the S&P 500 are likely to attract more individual money, which could easily propel the S&P 500 up another 30% to 2,000.

The S&P 500 is 45% cheaper today than at the dot-com peak. Bloomberg News reports that the S&P 500's P/E was 32.8 at its March 2000 peak -- 22% higher than the 25.7 P/E it sported at its October 2002 post 9-11 low and 45% above today's P/E of 18.

Since individual investors have stayed away, corporate acquirers -- which spurred a record $1.7 trillion in M&A volume in 2006 -- have seen stocks as cheap as measured by the widening gap between company earnings yields and the cost of borrowing. For example, estimated profit at S&P 500 companies represented a yield of 6.53% at the end of Q1 2007, when 10- year U.S. Treasuries yielded 4.65%. The 1.88-percentage- point advantage was the biggest since at least 1986. As of May 31st, the gap totaled 1.24 percentage points.