PE on the SPX now 62? With rising interest rates, pretty hard to justify, IMVHO....
schaeffersresearch.com
In my office, I listen to CNBC on a daily basis to stay on top of breaking news or to gauge the sentiment of Wall Street. For those who watch CNBC, they have a Closing Bell segment with Maria Bartiromo and Tyler Mathisen as hosts. After the closing bell, they usually do a remote with Bob Pisani from the New York Stock Exchange who summarizes what the floor traders and others are saying about the market.
One of the consistent themes that Pisani has been reporting is that traders see positive economic reports and a bottoming in the economy. This optimism is often hedged by the concern that earnings must come out strong to justify the current price-to-earnings ratio of the market. As an objective reporter, Pisani sees bulls arguing for a stock market rally because of recent positive economic reports while the "bears" are suggesting that the market has little upside potential because of the excessive price-to-earnings ratios that stocks are trading at. Because of this recurring theme, I took a look at the price/earnings ratio for the market.
According to Bloomberg, the S&P 500 Index (SPX – 1164.31) is currently trading with a price-to-earnings ratio of 62. This is rather excessive no matter what period you comapre it to. In March 2000, the price-to-earnings ratio was 31, according to Bloomberg. Additionally, when the market spent 1994 in the doldrums (a.k.a. "stealth" bear market), the price-to-earnings ratio was around 20. Finally, during the last recession and true bear market in 1990, the price-to-earnings ratio dropped to 15.
One of the reasons why the price-to-earnings ratio is so high is due to so many companies reporting losses. Obviously, this is due to a slowdown in the economy and the excess these companies had in front of the slowdown. Acccording to data pulled from Bloomberg, there are 47 companies in the SPX that have an indeterminable price-to-earnings ratio. Below is the list of companies who are reporting losses for the year.
Even after taking these 47 names out of the calculation, the price-to-earnings ratio for the SPX would still be a very high 34, according to data from Bloomberg. This ratio is still well above the March 2000 ratio in spite of the SPX being 25 percent below the highs made in March. Thus, the economic slowdown has really hurt earnings across the spectrum.
For those trading bulls who are arguing that the economy is turning the corner to overcome this historically high price-to-earnings ratio, either earnings will have to expand to the mid-to-high teens (or even better) on a percentage basis or we will enter a period of exorbitant valuations and irrational pricing of stocks. From my perspective, the decline of 2000-2001 is still too fresh in everyone's mind for another period of overvaluation to occur. It certainly could happen, as you can't rule anything out in the market, but the chances of a great bull run that we had in the latter half of the 1990s seem awfully slim. |
