S&P 500 More Expensive Than Ever

posted by Nima

June 10, 2009 · Posted in General Economics 

The common notion is almost unanimous. Green shoots, bottom, recovery, V shape, problems fixed, done … There is certainly no lack of optimism on Wall Street and in the financial news media. Certainly we cannot possibly go any lower, can we?

But the S&P 500 is embarking upon gratuitously high price earnings ratios:

… in fact, there has never been a time in history since tracking this data where the S&P500 has been more expensive than it is right now. The highest up to now had been in 2000 when it was at a PE ratio of around 45.

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5 Responses to “S&P 500 More Expensive Than Ever”

  1. Rafi on June 11th, 2009 12:52 pm

    This chart is totally wrong, this is closer: http://www.multpl.com/

    You have to look at price relative to next years earnings to normalize – that’s what people look at. No one really thinks S&P is trading at 100x earnings – that makes absolutely no sense. PE’s of 100x imply earnings are growing greater than 50% per yr over the next 10 yrs or so… that number is ridiculous because it includes Q1. It’s really at 16x earnings.

    Accounting rules make companies differentiate between recurring revenue and one-off, non-recurring earnings, so if you include the non-recurring (which no one looks at), you get 100x…if you look at recurring, you get 16x.

  2. Nima on June 11th, 2009 4:07 pm

    But the number is at a record high nonetheless …

  3. Rafi on June 11th, 2009 5:24 pm

    This is true, but when I first saw this chart I was like, “OMG must short S&P right now!!” I showed it to some friends and discussed it, then thought better of it.

    It’s another way of showing how much money was lost though, and who doesn’t like a dramatic chart.

  4. Rob on June 12th, 2009 10:34 am

    http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,1,7,0,0,0,0,0.html

    Might want to take a look at some of the other fundamentals. Like ROA, Dividend Payout ratio, Price to Free Cash Flow(which i think is the biggie) and Price to Sales.

    Earnings can be manipulated, Free Cash Flow is more accurate.

    This being said, there has been a lot of change in the stocks that are actually in the S&P 500, so looking this far in the past might be misleading regarding the Dow and S&P 500 moving forward.

    Nima i highly enjoy your site.

  5. Nima on June 12th, 2009 10:44 am

    Good point, I said the same thing about Free Cash Flow in http://www.economicsjunkie.com/stock-evaluation/

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