09/06/09 8:46 am - S&P 500 Price, Earnings, and P/E Ratio Charts

I created the following charts after hearing about the insane S&P 500 P/E ratios of 143 in July and 129 in August. I needed to verify those numbers for myself, and came across several sources reporting the P/E ratio of the S&P 500 as only 18 in August. Which one is correct?

Using Standard & Poor’s own website, the P/E ratio for August is indeed 129.19. I also found historical data on the S&P 500 price, dividends, earnings, and P/E ratio on Robert J. Shiller’s website. He calculates the S&P 500 P/E ratio as the ratio of the S&P 500 price level and a 10-year moving average of the earnings data. The result is a P/E ratio of 18 for August. A 10-year moving average really smoothes out the P/E ratio and the last few months of 100+ P/E ratio values are lost in the average. For the purpose of evaluating present value of the S&P 500 a 10-year moving average really isn’t adequate, and instantaneous (monthly) values should be used as reported by Standard & Poor’s.

The charts below really speak for themselves. Looking at the wide gap between current S&P 500 price levels of about 1000 and earnings around 7 (these are earnings levels last seen in the ’70s!), there is no question that the markets are still heavily overvalued, and a second downleg is highly likely. The markets are still in denial, and P/E ratios of more than 100 simply cannot persist for much longer.

Historically, P/E ratios have always moved in long waves spanning several decades, and at the end of bear markets they always return to values below 10 (see the P/E ratio chart for 1900-1950 at the bottom of this post). It is unlikely that we’ll see a quick recovery of S&P 500 earnings, so the only logical conclusion left is a reduction of the S&P 500 price to levels in the 100..200′s. I don’t think this will happen within a year, but it could happen over the course of 10 or 20 years. We may see a gradual decline in price while earnings remain depressed.

(Note: I will post updates on these charts monthly: click here. Or you can find the most recent chart on our free charts page.)






September 6, 2009 · Filed under Uncategorized

6 Comments »

  1. EURUSD: Hitting 1.45 and key TL, consolidation seen near term | Kangarootail.com Said,

    September 8, 2009 @ 6:44 am

    [...] $1000 for at least a few days, and I’m still very bearish on the equity markets (see my post on the S&P500 P/E ratio.) This could be the final push and I would not be at all surprised if the dollar finds a bottom in [...]

  2. S&P 500 P/E Ratio remains near record high | Kangarootail.com Said,

    October 7, 2009 @ 8:34 am

    [...] low earnings. (See updated charts for price, earnings, and P/E ratio of the S&P 500 below, and click here for more information on the source for this data in my post from last [...]

  3. Jeff14 Said,

    November 3, 2009 @ 10:53 am

    Hello,

    I went on Standard and poor website to get the data for the P/E Ratio but there is something I dont understand.
    For exemple when they give:
    12/31/2001 29.55
    09/30/2001 24.77
    06/30/2001 26.03
    03/31/2001 21.94
    the PE is given for the quarter or a trailling 12month each time?
    Then if i want the PE for 2001, should I just get the last number for 2001 or make an average of the 4 quarters ??

    Thank you!

  4. admin Said,

    November 3, 2009 @ 3:24 pm

    Jeff,

    not sure how Standard and Poors calculated that data, I just use their monthly P/E ratio and try not to average anything. Shiller applied a moving average over 10 years, which is a valid thing to do, but one has to keep in mind that smoothes out the curve quite a bit. If you want a yearly P/E ratio, I would do what you said, average the 4 quaterly values. I don’t believe the quarterly values are 12-month moving average values, probably end-of-quarter values. You’d have to email S&P to find out for sure. Shillers data used quarterly values before S&P reported monthly P/E ratios, and he extrapolated the months in between. See his Excel spreadsheet that I linked to, and take a look at the formulas he used.

  5. Jeff14 Said,

    November 16, 2009 @ 10:59 am

    Ok thx a lot for your help

  6. Jeff14 Said,

    November 16, 2009 @ 11:58 am

    If you are interested I just figured out :)
    The P/E given each quarter is given according to the last 4quarters of earnings per share. So I dont need an average my question was kind of nonsens. I dunno if my explanation is clear so here is an example. When you look at the excel sheet given by Standards and Poors you can see(simplified version):
    Price EPS P/E
    12/31/2001 1148.08 $9.94 29.55
    09/30/2001 1040.94 $9.16 24.77
    06/30/2001 1224.38 $9.02 26.03
    03/31/2001 1160.33 $10.73 21.94
    12/31/2000 1320.28 $13.11 23.52
    09/30/2000 1436.51 $14.17 25.30

    To get the yearly EPS I need to sum up the 4 quarters of 2001 which gives me $38.85
    Then to get the P/E for 2001 I do 1148.08/$38.85= 29.55, which is the same result as the one shown on the 09/30/2001.
    TO get any P/E (for any quarter) I need to use the EPS of each last 4 quarters. Then P/E is always given in a per year basis. And I must do the same operation to get the P/E of each quarter.

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