The Highest P/E Ratio in 18 Years

In today’s Wall Street Journal, Paul Vigna has an article noting the very high valuations for the stock market.

The price/earnings ratio on the S&P 500, measured against the past 12 months of earnings, stands at 25.26, according to FactSet. That is the highest level since 2002. The forward P/E, measured against earnings expectations for the next year, is at 25.98—a mark last hit in September 2000.

And the valuation of the median stock in the S&P 500, measured by forward P/E, is now in the 100th percentile of historical levels, according to Goldman Sachs Group Inc., going back four decades—the highest level possible. The index itself is trading at the 98th percentile.

The problem when applying valuation metrics to the broader market is that markets can be overvalued or undervalued for years.

Another issue, and one that is rarely addressed, is that valuations do change. For example, stocks today have higher valuations than they did before 1960. If you had followed the pre-1960 rules, you would have concluded that the market was consistently overvalued.

The elevated P/E Ratio is noteworthy but it shouldn’t scare anyone out of the market.

Posted by on August 24th, 2020 at 2:39 pm


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.