Source: Bespoke Investment Group


How expensive are stocks?

Its a question that seems to beget many different answers. Too often, the response reflects the responder’s investment posture. If they are long equities, they typically respond by saying “Not very.” If they are short, or in cash or in other risk assets, the answer is the opposite.

For today’s chart, I wanted to look at this question differently, by considering different P/E ratios relative to history. What does looking at P/E ratios over 10, 25 or 85 years do to what is the historical average ? continues here

Category: Index/ETFs, Investing, Markets, 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.

5 Responses to “How Much Do S&P500 P/E Ratios Vary Historically?”

  1. rd says:

    It looks to me that the stock market tends to have periods of 10-20 years in length where it is typically above or below the long-term average. It is rarely at average.

    So we have just had 20 years above average and it appears to be trending lower towards the mean. What are the odds we could end up with a period of 10-20 years of below average PEs starting the next few years?

  2. Concerned Neighbour says:

    I’d make a number of counter-arguments:

    1. You shouldn’t rely on a single indicator to determine the value of stocks. From following your blog for some years now I know you don’t do this, but in isolation this post does. For example, I find the number of so-called blue chip well-known companies with little to negative net tangible book value to be disturbingly high. A stock with P/E of 20 with marginal growth rates, high leverage and negative tangible book is seen as a bargain in this environment. (Then again, I forget myself: isn’t everything a “bargain” in this environment?)

    2. Which earnings are you talking about? Reported (“real” earnings), or operating earnings? The latter exclude so-called “one-time” charges that somehow seem to occur with great frequency over time.

    3. I remain far from convinced that we should be accepting of a higher P/E over the past 25 years than any other period.

  3. constantnormal says:

    PE being a measure of “valuation”, I find it awfully interesting that the PE of the S&P 500 was as high as it was in the decade following the Crash of ’29.

    One would think that, as the stock markets cratered, driven primarily by the collapse of leveraged margin debt, and secondarily by the collapse of a lot of bogus stocks and mutual funds (much the same way that we just had a collapse of a lot of bad mortgage debt and the plethora of derivatives based upon that bad debt), that people’s enthusiasm for stocks (and hence their valuation) would have gone through the floor — and there is a lot of historical anecdotal evidence that this was the case.

    And yet, while there was a lot of PE volatility in those years, it seems to have stayed mostly north of the long-term average. Not at all what I would have expected.

    The more I look at this chart, the less value I think that PE has (and I don’t put a lot of faith tin it as a measure of very much, due to it’s inherent backward-looking nature).

    • constantnormal says:

      … I guess I do see one way that PE’s could have held up in the 1930′s — if the earnings collapsed as fast as the stock prices.

  4. just-sayin says:

    I have another observation on these numbers.
    If you look at nearly all cases where the PE ratio got to about 20 or higher, then one of two things appeared
    to have happened. Either the PE ratio dropped from 20 quickly or it shot up quite quickly and then dropped
    quite quickly to below 20.and to much lower in some cases.
    Therefore, history seems to indicate that once the PEs hit 20…..its time to be very cautious.