The S&P 500 Is Still Below 16 Times Earnings

Here’s a look at the S&P 500 and its earnings. The index is the black line and it follows the left scale. The trailing four-quarter operating earnings is the gold line and it follows the right scale. The two lines are scaled at a ratio of 16-to-1 so whenever the lines cross, the P/E Ratio is exactly 16.

The black line has almost caught up to the gold line. The market hasn’t had its P/E Ratio at 16 since last May. The Double Dip hysteria of last summer brought the S&P 500 down below 1,030 and the P/E Ratio got as low as 13.62 which was a 20-year low.

There’s nothing magical about 16. It seems to be the number that the market most likes to track. The future part of the earnings line is Wall Street’s projection.

For 2011, Wall Street sees the S&P 500 earning 96.14. At a 16 P/E Ratio that means the market would be at 1,538.24 by year’s end. That’s a 14.5% rise from Friday’s close.

Posted by on February 22nd, 2011 at 2:18 pm


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