Today’s chart illustrates how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line).

The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.

20090821

Source: Chart of the Day

Category: Earnings, Technical Analysis, Think Tank, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Chart of the Day: S&P500 P/E Ratio”

  1. JustinTheSkeptic says:

    Wow, just think of all the money floating on that big pile of dung called the stock market.

  2. leftback says:

    UFB. It’s going to be interesting when we hit the y=7 axis again. Perhaps that only happens after rate hikes.

    NO worries, Bazza, we are in a completely new paradigm and have reached a permanently high plateau of P/E.
    Just talked to Johnny Buy-and-Hold and he is excited about this market. Couldn’t get him to buy in March…..

    It’s time to bring out your awesome Evel Knievel charts again, and then the Wile E Coyote cartoons in the Fall.

  3. Moss says:

    Yikes…. P/E contraction could be a real B.
    What would earnings have to be in Q4 to justify this multiple?

  4. leftback says:

    To put it another way, that really is an awful lot of lipstick right there.

  5. GregMoon says:

    I’m waiting to hear some “it’s different this time…” so I can get shorter than my already midget self.

  6. cvienne says:

    @LB

    If Evel Knievel launched himself off of that ramp, his motorcycle would end up back in 1950, or thereabouts…

    LMFAO

    Must be a lot of “earnings beats” coming in the fall…

    ROTF…Barry…this chart is funnier than all of the UBS comments yesterday! :-)

  7. deanscamaro says:

    Barry, I think the business to be in now is rose-colored glasses. They just have to be in short supply, because so many investors must be wearing them. They are so tired of bad economic news that they have to put them on to convince themselves to get back into a bad fundamentals market.

  8. Barry, I think the business to be in now is rose-colored glasses.

    I think we should move straight to the cyanide pills

  9. Haigh says:

    “I’m waiting to hear some “it’s different this time…” so I can get shorter than my already midget self.”

    Here’s the difference:

    http://blogs.wsj.com/economics/2009/07/16/a-look-inside-feds-balance-sheet-71609-update/

    If you eliminate short duration event driven down spikes, the flood of liquidity is going to have to find a home. Few pools are as big as the US stock market, big enough to take the global liquidity tsunami when it wants to rush away from computer created currency.

  10. alfred e says:

    Just goes to show what SLP and PPT can do.

    Looks strikingly familiar to the oil run-up of last year.

    Just shows you what market moving speculators can do to the rest of us sheeple.

  11. dbneal says:

    There should be a spike in the 1981 recession too as I think corporate earnings dropped to nothing or went negative meaning PE is infinite (Price divided by zero is infinity). In recession, investors are considering more normalized earnings power. Stocks therefore don’t drop to zero in sharp recessions.

    Just think, when the S&P was about 1400 before this latest crash, that was based on earnings that were, to some extent, illusory due to poor quality of earnings, massive debt increases/securitization PLUS a very high price applied to those illusory earnings!! Now back at S&P 1000, we’re at quite high valuations AND a highly risky/uncertain environment. It just goes to show you how out-of-whack 1400 was.

  12. farmera1 says:

    Bubble what bubble.

    All bubbles are liquidity driven. Need we look any farther to find where a lot of that liquidity is going now. So we have the following bubbles or bubble wanna be’s as I see it.

    1. Debt (that lovely exponential graph of Total US debt vs GNP)
    2. Stock market (see above)
    3. Commodities (oil, sugar, maybe with a touch of grain and farm land)

    At the same time there is deflation going on in many areas of the economy, like housing, wages, nat gas, dairy industry etc. How can anyone invest in this market. Trade yes, invest no.

    What might one call this environment. Rolling Bubblicious economy. An inflating, deflating economy.

  13. constantnormal says:

    How does this compare to the peak NASDAQ 100 PE during the dot-com bubble?

  14. [...] for a lot more than their companies are earning, beware. The historic P/E average is 15. Right now, it’s 100+! Even if you use the more stable “operating earnings” because you think reported earnings have [...]

  15. tjsingh says:

    If I look at SPY P/E ratio, it shows 14.09 as of June 30, 2009. SPY was 909 at that time. Now it is 1028. Assuming flat earnings P/E is roughly 15.93. Therefore I don’t understand why P/E ratio of S&P 500 is over 100..

  16. [...] 1 — Barry Ritholzt’s Chart of the Day: S&P 500 PE Ratio from August 21st. “The price investors were willing to pay for a dollar of earnings increased [...]

  17. [...] at P/E.  When current price is over 100 times earnings, you have to be concerned.  Take a look at this chart from late August, and tell me that it’s not scary!  Obviously, prices have not dropped as [...]