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Bespoke: S&P 500 P/E Ratio Approaching 23

TedTed
in Fund Discussions
FYI: As the S&P 500 climbs higher and higher, its trailing 12-month P/E ratio continues to climb as well. And there won’t be much opportunity for multiple compression until the bulk of S&P 500 companies report Q4 numbers in late January.

As shown below, the S&P’s 12-month P/E is now at 22.88 — just a hair below 23.

Below is a chart showing the S&P’s P/E ratio going back to 1980. The line is red when the P/E ratio is above the level it’s at right now. As you can see, there have only been a few periods over the last 35+ years where the index’s P/E was higher. It didn’t once get above this level during the 2002-2007 bull market, but it was consistently above 23 during the final three years of the bull market that ended in early 2000. From 1998 to 2000, the S&P’s P/E expanded from 23 up to 30+ as the Dot Com bubble reached its zenith. Over this period, the S&P experienced a massive rally as the Tech sector soared. While valuations are indeed elevated right now, we always note that high valuations alone are not a catalyst for corrections or bear markets.
Regards,
Ted
https://www.bespokepremium.com/think-big-blog/sp-500-pe-ratio-approaching-23/

Comments

  • PBKCM
    Thanks Ted. I prefer to look at forward PE. And not in a vacuum either. Inflation is a big part of the valuation equation.
  • davidrmorandavidrmoran
    High valuations has never been a cause for bear markets.

    This is weak gruel for Stewart, and it is incredible he links it in any way to the election (when the whole world has done the same), but has some good quotes:

    https://www.nytimes.com/2018/01/04/business/market-dow-2018.html
  • Old_Skeet
    edited January 2018
    Well ... well ... well! What do we have here?

    There are many ways to price the market. I can remember within the past couple of years Liz Ann Sonders of Charles Schwab use to tout the Rule of Twenty as being plenty. I have not heard her speak much on P/E Ratios recently.

    Old_Skeet uses a blended P/E approach using both the TTM and FE. In this way credit is given for what stocks have done and are expected to produce. Then, I apply the Rule of Twenty as being plenty. My number computes to a P/E ratio of 20.7 as of market close 12/29/17. Still pricey at this number indicating the 500 Index is about 4% overvalued, by my p/e mythology.

    The 500 Index Blended P/E ratio is one of the feeds I use in my market barometer.

    And, so it goes ...
  • beebee
    edited January 2018
    This article seems like a good 2018 read for market forecast returns:
    Some sniglets:
    Quote: I totally reject the notion that bonds have more risk than stocks. A broadly diversified stock fund has more risk in a day than a similarly diversified high-quality bond fund, such as iShares Aggregate Bond Fund (AGG), has in a year. Never forget that on Black Monday 1987, stocks lost over 20% in one day, which equates to six standard deviations (six sigma) of the AGG in one year, meaning it should happen no more often than once out of every 294,117 years.
    image
    seven-warning-signs-of-market-gurus-and-which-forecasts-you-can-trust
  • davidrmorandavidrmoran
    http://www.multpl.com/shiller-pe/
    http://www.multpl.com/

    Concerning as always, but what're you gonna do?
  • MikeMMikeM
    Good stuff bee. I used to use these probability calculations to figure out the risk in my portfolio. So, given the info in your post, a 60:40 portfolio (equity 50:50 split between US and Int) you would expect your yearly returns to fall in the range of +26.9% and -15.9%, 95 times out of 100. That seems safe, but the problem is that damn 5% on the down side of the curve. Like seen in 2008, that can be a whole lot worst then losing -15.9%. I believe 60:40 portfolios lost more like -30%+ on average.
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