- The Big Picture - http://www.ritholtz.com/blog -

Chart of the Day: S&P500 P/E Ratio

Posted By Barry Ritholtz On August 21, 2009 @ 1:30 pm In Earnings,Technical Analysis,Think Tank,Valuation | Comments Disabled

Today’s chart [1] 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 [2]

Source: Chart of the Day [3]

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/08/chart-of-the-day-sp500-pe-ratio/

URLs in this post:

[1] chart: http://www.chartoftheday.com/20090821.htm?T

[2] Image: http://www.ritholtz.com/blog/wp-content/uploads/2009/08/20090821.gif

[3] Chart of the Day: http://www.chartoftheday.com/

Copyright © 2008 The Big Picture. All rights reserved.