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
5 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 [...]
where did you ever get 134X???
i have s&p’s spreadsheet before me right now, and i see that june 30 2009′s as reported was 122.41. it has precipitously dropped by the way. the following quarter was 84.3. december 2009 was 21.88. it is currently 16.22, which is not bearish at all.