S&P 500 Sports an Eye-Popping 134x P/E
Saying that equities are overvalued here is a monumental understatement. The market is priced for a miraculous recovery, in every sector, starting tomorrow. It’s priced as if America’s debt (at all levels) will disappear, or is a non-issue. Valuations must also assume that consumers will resume spending beyond their means immediately, and that this is sustainable.
None of these rosy scenarios are gonna happen. Consumer-spending hit a wall last Fall, when it finally dawned on people that we can’t spend forever, using inflated houses as refi-ATMS. Another, more severe collapse is imminent. But we might move up for a while longer, so be careful on the short side. This market is manipulated and delusional.
A Note on Price/Earnings Ratios
The 134x P/E is based on trailing 12 month P/E. This is the reported (or real) earnings. Many media outlets and companies prefer to focus on so-called pro-forma, or “operating earnings”. I did a follow-up piece here on that.
Updated 7/27/09
4 Comments
S&P’s calculation of its own P/E has been the subject of some controversy, too much to get into here. But to directly answer your question: The P/E that you cite (134) is not based only on Q2 2009 earnings. It is based on the last 4 quarters of “earnings” as calculated by S&P, divided by today’s value of the S&P 500 index. Thus, it is a TTM (trailing twelve months) calculation. Using TTM for earnings, by the way, is standard practice for calculating P/E. Other P/E’s, such as “Forward P/E,” include estimates of earnings that have not been reported yet. The trailing P/E is based on numbers already reported. The reason I put the quote marks around “earnings” is that S&P manipulates and adjusts actual earnings to get the E number that they divide by. That is, that number is not the sum of earnings of the 500 stocks in the index. I have not been able to figure out how or why they do this, but it obviously affects the P/E that they report.
Thanks Dave. I’m familiar with forward and trailing, but S&P didn’t specify what that 134 number was based on. Shoulda remembered that all trailing P/Es are based on 12 months. Thanks for clearing it up. Over the past few days I’ve been delving into the convoluted world of “operating earnings” vs. “reported earnings”. Crazy stuff.
[...] noting that this rally has pushed the S&P 500 P/E ratio to 144 as of July 31 2009, up from 134 June 30. Everyone is hoping that consumers will drag us out of this, assisted by TALF. But giving [...]
[...] noting that this rally has pushed the S&P 500 P/E ratio to 144 as of July 31 2009, up from 134 June 30. Everyone is hoping that consumers will drag us out of this, assisted by TALF. But giving [...]