My detailed analysis on the valuation of the Dow Jones Industrial Average is updated. On a point estimate basis it appears to me that it is about 6% overvalued or not far from fair value. But the article shows that it can be considered 14% under-valued if we assume that investors only require an expected return 6% in this low interest rate environment and we assume 5% annual earnings growth a P/E of 19 after a ten year holding period. So, while I provide a point estimate of 6% over-valued there is uncertainty around that.

My 6% over-valued point estimate for the DOW is in sharp contract to the 41% over-valued point estimate that I arrived at for the S&P 500 just a few weeks ago. And I used the same assumptions around growth, required return and terminal P/E ratio. I did however adjust up the earnings on the DJIA toward the forecast earnings level because the GAAP earnings appeared to be below trend line. But that would not explain a large proportion of the huge valuation difference between the two indexes.

Both of these are large cap indexes and so one might think the valuations should be similar.

Since the DOW only has 30 companies it is possible that these 30 are simply trading at more reasonable values compared to the S&P 500.

Also the S&P 500 is a market value weighted index and may be more susceptible to being distorted by its largest holdings.

It is also possible that the earnings on the S&P 500 are about to soar in relation to the earnings on the Dow Jones Industrial Average.

Based on my analysis, if I wanted exposure to the largest companies in the U.S A. I would strongly favor a Dow Jones Industrial Average Index E.T.F. rather than an S&P 500 index ETF at this time.