Friday, October 9, 2009

S&P500: Average P/E Now 49.05, At Highest Level

The average P/E of the universe of S&P500 companies is no 49.04, the highest it has been this year. We track this live here. These are the numbers as provided by Google and are trailing P/Es corresponding to reported earnings, only for companies with positive earnings. Comparison over time are based on exactly tthe same criteria. You can pick and choose many different numbers to compute "P/E", I always use the same.

To compute the average we only use those companies with positive earnings. It is interesting to observe that the number of these is getting smaller and smaller with every month:

April: 16.44, 398 companies
May: 40.99, 385 companies
June: 43.23, 383 companies
July: 42.00, 383 companies
Aug: 47.50, 379 companies
Sep: 45.04, 378 companies
Oct: 49.04, 377 companies

David Rosenberg reports today on the overvaluation of the S&P500 based on P/Es. He shows the following P/E chart:

His comments:


There has been plenty of debate over whether equities are overvalued or not, and certainly we would assume that many investors know where we stand on the topic. Let’s look at the facts now that the September data are in. On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x.

Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today (and that 15x is also calculated off depressed earnings level of prior recessions – we have more on the historical comparisons below). While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble.It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ‘recession earnings’ (even though using ‘forward’ earnings means relying on consensus forecasts on the future and these are rarely, if ever, correct).

It is also interesting that the last time the multiple was this high was back in March 2002, again after a huge countertrend rally that deployed ‘recession earnings’ from the 2001 downturn. If memory serves us correctly, this was right around the time that the bear market rally started to roll over and in fact, six months later, the S&P 500 was hitting new lows and 34% lower than it was when the multiple had expanded to … today’s level! "

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