The S&P’s P/E Ratio Falls to 18

With the recent dip in the stock market, the P/E Ratio of the S&P 500 is now down to 18. That number, however, is a bit misleading since earnings are still in the process of recovering from a nasty downturn.
Here’s a look at the S&P 500 (left scale) along with its earnings line (right scale). The two scales are plotted at a ratio of 16-to-1 so when the lines cross, the P/E Ratio is exactly 16. The future earnings line is S&P’s estimate.
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The total earnings for 2009 will be about $57. Bear in mind that at one point, Goldman Sachs thought that it would be $40. I still think stocks are a good buy, but this is an instance where looking at the P/E ratio doesn’t tell us much. The recent earnings trend is such an outlier. Naturally, if the earnings forecast holds up, then I would expect stocks to be much higher one year from now.
Remember that stocks are best measured by their alternatives. In this case, I think the more telling metric isn’t the Price/Earnings, but the yield curve. The spread between the 30-year T-bond the 90-day T-bill is over 450 basis points, which is gigantic. Even at 5-years out, a Treasury only offers a yield of about 2.3%. With the kind of competition, stocks are the best investment.

Posted by on February 12th, 2010 at 9:13 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.