S&P 500 and Earnings

Here’s a look at the S&P 500 (black line, left scale) over the last few years with its earnings (gold line, right scale).

The two lines are scaled at 16 to 1, meaning when the lines cross the market’s P/E ratio is 16. I used 16 because it seems that the market has tracked that fairly well for the past few years. This market top wasn’t marked by outrageous earnings multiples. The values were fine it was the fundamentals that were shaky.
Two points to note. I used to operating earnings. That seems to get some people bent out of shape but it’s a much better tool for looking at the market as a whole. Also, AIG’s massive loss took out $5.13 from earnings in Q4, so that distorts the picture a little.

Posted by Eddy Elfenbein on April 28th, 2009 at 3:28 pm

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