S&P 500 Forward P/E ratio - Are stocks highly valued?

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willthrill81
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S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Thu Sep 20, 2018 11:03 pm

We hear a lot of folks talk about how "highly valued" that U.S. stocks currently are. But when I look at this chart, it seems that relative to the last 20 years, U.S. stocks are priced about average. I'm not saying that forward P/E ratios are perfectly precise because they obviously aren't. But at the same time, I'm not convinced that they are any less appropriate as a measure of stocks' current value than a backward looking metric like CAPE. It certainly seems like 'the market' think so.

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Thoughts?
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by stlutz » Thu Sep 20, 2018 11:09 pm

Two assumptions are required for the chart to hold:

1) The higher projected earnings for the next year have to pan out.

2) That market can't go up from here over the next year or so.

In short, a lot of earnings growth over the next year or two is currently priced into the market. Reasonably so. Whether the market is "highly valued" or "fairly valued", is isn't "cheap" currently.

I'm not see anything valuation-wise that makes me want to reduce my strategic US equity allocation, however.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 10:20 am

stlutz wrote:
Thu Sep 20, 2018 11:09 pm
In short, a lot of earnings growth over the next year or two is currently priced into the market. Reasonably so. Whether the market is "highly valued" or "fairly valued", is isn't "cheap" currently.
Just based on that chart, I wouldn't call the market 'cheap' either; it looks about 'average'.
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Are stocks highly valued?

Post by Taylor Larimore » Fri Sep 21, 2018 10:27 am

Are stocks highly valued?
willthrill81:

There are many ways to value stocks. It doesn't matter to me.

I avoid market-timing and stay-the-course.

Best wishes.
Taylor
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by MichCPA » Fri Sep 21, 2018 10:39 am

Keep in mind that backward looking metrics will probably not take the tax law into account. Its has definitely pushed up prices, but a TTM P/E wouldn't bake in a full cycle of earnings under the new law. Trailing P/E might be inflated and its is still only .3 greater than last year on the S&P 500. It will be interesting to see where we sit at the end of the year when those changes cycle through. Kind of interesting that despite all of the predictions, from a valuation standpoint, we aren't any more over heated than we were a year ago and the 'next recession' calls have gotten pushed out a year.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 11:13 am

MichCPA wrote:
Fri Sep 21, 2018 10:39 am
Keep in mind that backward looking metrics will probably not take the tax law into account. Its has definitely pushed up prices, but a TTM P/E wouldn't bake in a full cycle of earnings under the new law. Trailing P/E might be inflated and its is still only .3 greater than last year on the S&P 500. It will be interesting to see where we sit at the end of the year when those changes cycle through. Kind of interesting that despite all of the predictions, from a valuation standpoint, we aren't any more over heated than we were a year ago and the 'next recession' calls have gotten pushed out a year.
Yes, it is indeed interesting that the forward P/E hasn't risen much over this same time last year, despite lower taxes.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by hdas » Fri Sep 21, 2018 11:18 am

not incorporating interest rate levels to these types of valuation 'analysis' render them worthless. H
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by alex_686 » Fri Sep 21, 2018 11:26 am

hdas wrote:
Fri Sep 21, 2018 11:18 am
not incorporating interest rate levels to these types of valuation 'analysis' render them worthless. H
Yes. Well sorta of. PE is a relative measure. If you are going to say it is high you have to say what it is high against, and you can't say "to itself". Interest rates are one of the more popular metrics, but that ignores the Equity Risk Premium. There are other metrics.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by bgf » Fri Sep 21, 2018 12:09 pm

when people talk about the SP500 like bitcoin or pot stocks, i'll probably take the view they are highly valued.

definitely not the case right now.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by chisey » Fri Sep 21, 2018 1:36 pm

willthrill81 wrote:
Thu Sep 20, 2018 11:03 pm
We hear a lot of folks talk about how "highly valued" that U.S. stocks currently are. But when I look at this chart, it seems that relative to the last 20 years, U.S. stocks are priced about average. I'm not saying that forward P/E ratios are perfectly precise because they obviously aren't. But at the same time, I'm not convinced that they are any less appropriate as a measure of stocks' current value than a backward looking metric like CAPE. It certainly seems like 'the market' think so.

Thoughts?
There's a huge increase in earnings baked into that. Per the Wall Street Journal and as of last Friday, forward PE was 17.87 and trailing PE was 24.11. That implies a forecasted earnings growth of 35% from the last year to the next. Over the last 5 quarters YOY earnings growth has been between 15 and 20% . . . is it reasonable to expect double that? Maybe, maybe not. But I think the earnings forecasts are very, very optimistic.

Note that those expectations are baked into prices *right now* and only under that assumption are valuations at that multiple. If earnings fail to meet those high forecasts, expect prices to fall.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by KyleAAA » Fri Sep 21, 2018 1:50 pm

I agree. I think the market is fairly priced or maybe just slightly overpriced. Morningstar seems to agree. That's why I don't buy the "expect low returns over the next decade" arguments. Why shouldn't we expect average returns? I think 8-10% is very realistic and probably more likely than the 3-6% I see people going on and on about.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 1:58 pm

KyleAAA wrote:
Fri Sep 21, 2018 1:50 pm
I agree. I think the market is fairly priced or maybe just slightly overpriced. Morningstar seems to agree. That's why I don't buy the "expect low returns over the next decade" arguments. Why shouldn't we expect average returns? I think 8-10% is very realistic and probably more likely than the 3-6% I see people going on and on about.
I don't understand why the big proponents of CAPE believe that earnings from ten years ago have anything to do with what stocks will return ten years from now.
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Re: Are stocks highly valued?

Post by knpstr » Fri Sep 21, 2018 2:39 pm

Taylor Larimore wrote:
Fri Sep 21, 2018 10:27 am
Are stocks highly valued?
willthrill81:

There are many ways to value stocks. It doesn't matter to me.

I avoid market-timing and stay-the-course.

Best wishes.
Taylor
+1

I've determined I cannot accurately value stocks nor predict markets, that is what attracted me to indexing. It is a great strategy for the "know nothin'" investor, like myself.

My only prediction is that over the next 60 years "markets will be up".
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by alex_686 » Fri Sep 21, 2018 2:43 pm

willthrill81 wrote:
Fri Sep 21, 2018 1:58 pm
I don't understand why the big proponents of CAPE believe that earnings from ten years ago have anything to do with what stocks will return ten years from now.
Because for the S&P 500 index it does a better job of predicting long term earnings growth than forward earnings over the next 10 years. 2 reasons.

First, forward earnings and current earnings tend to have issues with big one off accounting write offs. It helps if you understand that there is a disconnect between Cash Flow to Equity (economic return) and accounting standards. CAPE is a mechanical way to smooth the differences between the 2.

Second, to calculate the forward earnings of the S&P 500 you add up all of the forward earnings of each of the individual companies. Stock analyst are consistently overly optimistic about the individual companies that they cover, even if they are pessimistic about the sector or the market.

Do you like rear facing rock hard accounting data or forward facing mushy subjective data? I personally like both and I use both. Right tool for the right job. For indexes I skew towards CAPE.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 2:50 pm

alex_686 wrote:
Fri Sep 21, 2018 2:43 pm
willthrill81 wrote:
Fri Sep 21, 2018 1:58 pm
I don't understand why the big proponents of CAPE believe that earnings from ten years ago have anything to do with what stocks will return ten years from now.
Because for the S&P 500 index it does did a better job of predicting long term earnings growth than forward earnings over the next 10 years.
Fixed that for ya. :wink: Since Shiller mined proposed it, CAPE has not been as good of a predictor as it appeared to be beforehand.
alex_686 wrote:
Fri Sep 21, 2018 2:43 pm
First, forward earnings and current earnings tend to have issues with big one off accounting write offs. It helps if you understand that there is a disconnect between Cash Flow to Equity (economic return) and accounting standards. CAPE is a mechanical way to smooth the differences between the 2.
That's the only thing that I see that CAPE and similar metrics have going for them.
alex_686 wrote:
Fri Sep 21, 2018 2:43 pm
Second, to calculate the forward earnings of the S&P 500 you add up all of the forward earnings of each of the individual companies. Stock analyst are consistently overly optimistic about the individual companies that they cover, even if they are pessimistic about the sector or the market.
That would only be an issue if analysts were not consistently optimistic.

My point with this thread was merely to illustrate that the idea that 'valuations are high' is not true of all valuation metrics. CAPE appears to be high, but more 'current' metrics do not appear to be high.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by MotoTrojan » Fri Sep 21, 2018 3:14 pm

willthrill81 wrote:
Fri Sep 21, 2018 11:13 am
MichCPA wrote:
Fri Sep 21, 2018 10:39 am
Keep in mind that backward looking metrics will probably not take the tax law into account. Its has definitely pushed up prices, but a TTM P/E wouldn't bake in a full cycle of earnings under the new law. Trailing P/E might be inflated and its is still only .3 greater than last year on the S&P 500. It will be interesting to see where we sit at the end of the year when those changes cycle through. Kind of interesting that despite all of the predictions, from a valuation standpoint, we aren't any more over heated than we were a year ago and the 'next recession' calls have gotten pushed out a year.
Yes, it is indeed interesting that the forward P/E hasn't risen much over this same time last year, despite lower taxes.
Not really that interesting at all. The market feels it is an appropriate multiple and earnings estimates went up due to the tax-bill, no?

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by randomizer » Fri Sep 21, 2018 3:18 pm

I sure hope they're not overvalued, mostly because I like a smooth ride. But either way, I am on this train for the duration; my investment horizon is very long.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by HomerJ » Fri Sep 21, 2018 3:20 pm

willthrill81 wrote:
Fri Sep 21, 2018 2:50 pm
My point with this thread was merely to illustrate that the idea that 'valuations are high' is not true of all valuation metrics. CAPE appears to be high, but more 'current' metrics do not appear to be high.
CAPE 8, by the way, is nearly 5 points lower than CAPE 10 (because you get to drop off 2008-2009), and CAPE 8 supposedly has nearly the same predictive power as CAPE 10.

So which one is right?
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by alex_686 » Fri Sep 21, 2018 3:22 pm

willthrill81 wrote:
Fri Sep 21, 2018 2:50 pm
alex_686 wrote:
Fri Sep 21, 2018 2:43 pm
willthrill81 wrote:
Fri Sep 21, 2018 1:58 pm
I don't understand why the big proponents of CAPE believe that earnings from ten years ago have anything to do with what stocks will return ten years from now.
Because for the S&P 500 index it does did a better job of predicting long term earnings growth than forward earnings over the next 10 years.
Fixed that for ya. :wink: Since Shiller mined proposed it, CAPE has not been as good of a predictor as it appeared to be beforehand.
I would challenge that. What is your source? The last time I did serious research on this - which was about 5 years ago - CAPE was robustly ahead of 1 year forward earnings in predicting 10 year returns.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Fri Sep 21, 2018 3:29 pm

I don't know why you'd only look at the last twenty years.

Oh, maybe it's because if you looked at a longer period of time, we'd find your assertion that stocks are about average to be complete phooey. Today's prices only look average if you ignore the prior 80 years of market history.

In fact compared to everything but the late 1920s and the late 1990s, stocks are at record highs by many metrics.

As for forward earnings, I'll trust them when someone can tell me the temperature next week Friday at noon with any degree of certainty.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by NoRegret » Fri Sep 21, 2018 3:31 pm

willthrill81,

From that graph alone I would say stocks are a little higher than fairly valued, may be expensive even, but not terribly so. However, other valuation metrics like P/B, P/C, P/FCF (this one may be ok), EV/EBITA and total market cap/GDP show stocks to be richly valued.

From your past posts I have a general idea of what you're trying to do. But valuation is a very poor timing tool -- that horse has been beaten to death on this forum, many times. It's not like there aren't other indicators.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 4:47 pm

letsgobobby wrote:
Fri Sep 21, 2018 3:29 pm
I don't know why you'd only look at the last twenty years.

Oh, maybe it's because if you looked at a longer period of time, we'd find your assertion that stocks are about average to be complete phooey. Today's prices only look average if you ignore the prior 80 years of market history.
I didn't create the graph, so you can go blame Yardeni, who created it. It was the only one I could easily find.
Last edited by willthrill81 on Fri Sep 21, 2018 4:51 pm, edited 1 time in total.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 4:48 pm

alex_686 wrote:
Fri Sep 21, 2018 3:22 pm
willthrill81 wrote:
Fri Sep 21, 2018 2:50 pm
alex_686 wrote:
Fri Sep 21, 2018 2:43 pm
willthrill81 wrote:
Fri Sep 21, 2018 1:58 pm
I don't understand why the big proponents of CAPE believe that earnings from ten years ago have anything to do with what stocks will return ten years from now.
Because for the S&P 500 index it does did a better job of predicting long term earnings growth than forward earnings over the next 10 years.
Fixed that for ya. :wink: Since Shiller mined proposed it, CAPE has not been as good of a predictor as it appeared to be beforehand.
I would challenge that. What is your source? The last time I did serious research on this - which was about 5 years ago - CAPE was robustly ahead of 1 year forward earnings in predicting 10 year returns.
Here's a quick one. CAPE has been higher than its long-term average in the U.S. since 1992 (not many years after Shiller proposed CAPE), yet real returns since then have been slightly above average.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 4:50 pm

NoRegret wrote:
Fri Sep 21, 2018 3:31 pm
From your past posts I have a general idea of what you're trying to do. But valuation is a very poor timing tool -- that horse has been beaten to death on this forum, many times. It's not like there aren't other indicators.
The only thing I'm trying to do is to demonstrate that the idea that 'valuations are high' is heavily dependent on which valuations you're talking about. For those that believe in the EMH, stocks should always be fairly priced.

Even though I'm a trend follower, I would never advocate the use of valuations as a timing tool because, as you say, they have been very poor in that regard. Valuations are not reliably mean reverting.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 4:50 pm

HomerJ wrote:
Fri Sep 21, 2018 3:20 pm
willthrill81 wrote:
Fri Sep 21, 2018 2:50 pm
My point with this thread was merely to illustrate that the idea that 'valuations are high' is not true of all valuation metrics. CAPE appears to be high, but more 'current' metrics do not appear to be high.
CAPE 8, by the way, is nearly 5 points lower than CAPE 10 (because you get to drop off 2008-2009), and CAPE 8 supposedly has nearly the same predictive power as CAPE 10.

So which one is right?
Good question. I have no idea. Maybe both are. Maybe both are wrong.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by marcopolo » Fri Sep 21, 2018 5:16 pm

willthrill81 wrote:
Fri Sep 21, 2018 4:50 pm
HomerJ wrote:
Fri Sep 21, 2018 3:20 pm
willthrill81 wrote:
Fri Sep 21, 2018 2:50 pm
My point with this thread was merely to illustrate that the idea that 'valuations are high' is not true of all valuation metrics. CAPE appears to be high, but more 'current' metrics do not appear to be high.
CAPE 8, by the way, is nearly 5 points lower than CAPE 10 (because you get to drop off 2008-2009), and CAPE 8 supposedly has nearly the same predictive power as CAPE 10.

So which one is right?
Good question. I have no idea. Maybe both are. Maybe both are wrong.
Even more confusing, on the day the 2008 earning are replaced by the 2018 earnings in the 10 year average, CAPE10 should drop by about 15%, with the same SP500 price level.

So, did valuations all of a sudden improve 15%, if you build your expected return model based on CAPE10, are you now expecting that much higher return the next day?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 5:19 pm

marcopolo wrote:
Fri Sep 21, 2018 5:16 pm
willthrill81 wrote:
Fri Sep 21, 2018 4:50 pm
HomerJ wrote:
Fri Sep 21, 2018 3:20 pm
willthrill81 wrote:
Fri Sep 21, 2018 2:50 pm
My point with this thread was merely to illustrate that the idea that 'valuations are high' is not true of all valuation metrics. CAPE appears to be high, but more 'current' metrics do not appear to be high.
CAPE 8, by the way, is nearly 5 points lower than CAPE 10 (because you get to drop off 2008-2009), and CAPE 8 supposedly has nearly the same predictive power as CAPE 10.

So which one is right?
Good question. I have no idea. Maybe both are. Maybe both are wrong.
Even more confusing, on the day the 2008 earning are replaced by the 2018 earnings in the 10 year average, CAPE10 should drop by about 15%, with the same SP500 price level.

So, did valuations all of a sudden improve 15%, if you build your expected return model based on CAPE10, are you now expecting that much higher return the next day?
Excellent point. We are told that analysts' forecasts aren't worth much, and I don't entirely disagree with that, but at the same time, 2008 earnings shouldn't have much of anything to do with today's prices. For all the talk of the 'wisdom of the market', I find it intriguing (and telling) that many here prefer backward looking metrics while the market itself is indisputably forward looking.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Fri Sep 21, 2018 5:39 pm

The market is forward looking but that doesn't mean it's accurately forward looking. Forward PE is highly susceptible to the "animal spirits" Bogle talks about; it's more a reflection of psychology (euphoria vs nihilism) than any facts on the ground. This is why past earnings are a better measure of value: if we accept certain accounting standards, they can't be adulterated.

Also, CAPE has not been above its long term average since 1992. For about one month in March 2009, it was below its long term average. 8-)

Finally, it is not correct that the 2008 earnings will suddenly drop off and be replaced with 2018 earnings. The multpl web site actually calculates Shiller PE daily and provides tabular data monthly. I believe Shiller's website used to calculate CAPE monthly if not daily but I haven't checked it in a long time. There won't be a cliff effect for these values. And not to be too dense, but for CAPE10 calculated daily, aren't most of the 2008 values already off? In September 2009 CAPE1 would include earnings from September 2008. In September 2018 CAPE10 would include earnings from September 2008.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 5:46 pm

letsgobobby wrote:
Fri Sep 21, 2018 5:39 pm
The market is forward looking but that doesn't mean it's accurately forward looking. Forward PE is highly susceptible to the "animal spirits" Bogle talks about; it's more a reflection of psychology (euphoria vs nihilism) than any facts on the ground.
On that point we can agree. And that's why I'm a trend follower and actually ambivalent to all valuation metrics.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by marcopolo » Fri Sep 21, 2018 6:05 pm

letsgobobby wrote:
Fri Sep 21, 2018 5:39 pm

Finally, it is not correct that the 2008 earnings will suddenly drop off and be replaced with 2018 earnings. The multpl web site actually calculates Shiller PE daily and provides tabular data monthly. I believe Shiller's website used to calculate CAPE monthly if not daily but I haven't checked it in a long time. There won't be a cliff effect for these values. And not to be too dense, but for CAPE10 calculated daily, aren't most of the 2008 values already off? In September 2009 CAPE1 would include earnings from September 2008. In September 2018 CAPE10 would include earnings from September 2008.
Are you sure about this? I was always under the impression that the denominator uses yearly earning. The CAPE is calculated daily, but that is because the numerator changes everyday. I am not sure the denominator does.

For example, the multpl site has tabular list of yearly inflation adjusted earning (low of 17.85 in 2008!), if i average those for the 2008-2017, i get $88.01. With a current price of 2929, that gives a PE10=33.3, pretty close to what is reported. There is no year end data, but if i use the March 2018 earnings, and drop the 2008 earnings in the average works out to $97.89, making the PE10=29.9. With full 2018 earnings, that should go even lower.

I have not seen any site that reports CAPE10 around 29 as opposed to 33. So, I am not sure your assertion that 2008 has already been replaced by 2018 number to a large extent is correct, but I could certainly be mistaken, do you have a reference that would show the calculations for that?
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Fri Sep 21, 2018 6:54 pm

marcopolo wrote:
Fri Sep 21, 2018 6:05 pm
letsgobobby wrote:
Fri Sep 21, 2018 5:39 pm

Finally, it is not correct that the 2008 earnings will suddenly drop off and be replaced with 2018 earnings. The multpl web site actually calculates Shiller PE daily and provides tabular data monthly. I believe Shiller's website used to calculate CAPE monthly if not daily but I haven't checked it in a long time. There won't be a cliff effect for these values. And not to be too dense, but for CAPE10 calculated daily, aren't most of the 2008 values already off? In September 2009 CAPE1 would include earnings from September 2008. In September 2018 CAPE10 would include earnings from September 2008.
Are you sure about this? I was always under the impression that the denominator uses yearly earning. The CAPE is calculated daily, but that is because the numerator changes everyday. I am not sure the denominator does.

For example, the multpl site has tabular list of yearly inflation adjusted earning (low of 17.85 in 2008!), if i average those for the 2008-2017, i get $88.01. With a current price of 2929, that gives a PE10=33.3, pretty close to what is reported. There is no year end data, but if i use the March 2018 earnings, and drop the 2008 earnings in the average works out to $97.89, making the PE10=29.9. With full 2018 earnings, that should go even lower.

I have not seen any site that reports CAPE10 around 29 as opposed to 33. So, I am not sure your assertion that 2008 has already been replaced by 2018 number to a large extent is correct, but I could certainly be mistaken, do you have a reference that would show the calculations for that?
No, I'm definitely not sure.

So if 2008 drops off in 3 months, then there will be a cliff of around 3 on the CAPE. Throw in the accounting changes Swedroe has previously discussed, and you get a value of around 25-ish, which is the number which would be compared to pre ~2004 levels. That is still high, but not the astronomical number it looks like on its face.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by HomerJ » Fri Sep 21, 2018 6:56 pm

letsgobobby wrote:
Fri Sep 21, 2018 3:29 pm
As for forward earnings, I'll trust them when someone can tell me the temperature next week Friday at noon with any degree of certainty.
Do you really believe the last 10 years of next week Friday at noon temperatures will tell you exactly about next week Friday at noon temperatures?
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Fri Sep 21, 2018 6:57 pm

HomerJ wrote:
Fri Sep 21, 2018 6:56 pm
letsgobobby wrote:
Fri Sep 21, 2018 3:29 pm
As for forward earnings, I'll trust them when someone can tell me the temperature next week Friday at noon with any degree of certainty.
Do you really believe the last 10 years of next week Friday at noon temperatures will tell you exactly about next week Friday at noon temperatures?
In fact isn't that exactly how predictions are made for 1+ weeks out? By looking at climate, ie, the past?

Would you trust a weather forecaster who completely ignored the history of the average temperature on September 28 at noon?

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by HomerJ » Fri Sep 21, 2018 6:58 pm

letsgobobby wrote:
Fri Sep 21, 2018 5:39 pm
Also, CAPE has not been above its long term average since 1992. For about one month in March 2009, it was below its long term average. 8-)
yeah 1 month out of 312... Seriously man, come on.
The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression. Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value” (see the black circle).

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken. There is no other way to coherently explain why the metric has consistently failed to migrate towards its long-term average, or spend any amount of time below it, as it should do every so often in bear markets.
And that was written FIVE years ago.

http://www.philosophicaleconomics.com/2013/12/shiller/
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by HomerJ » Fri Sep 21, 2018 6:59 pm

Duplicate
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Fri Sep 21, 2018 7:20 pm

HomerJ wrote:
Fri Sep 21, 2018 6:58 pm
letsgobobby wrote:
Fri Sep 21, 2018 5:39 pm
Also, CAPE has not been above its long term average since 1992. For about one month in March 2009, it was below its long term average. 8-)
yeah 1 month out of 312... Seriously man, come on.
I’m dead serious. It was a great buying opportunity. The intra-month low was around 12, 25% below its long term average and close to 50% below its 20 year average.
The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression. Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value” (see the black circle).

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken. There is no other way to coherently explain why the metric has consistently failed to migrate towards its long-term average, or spend any amount of time below it, as it should do every so often in bear markets.
And that was written FIVE years ago.

http://www.philosophicaleconomics.com/2013/12/shiller/

I agree something needs to be explained. But which is it? Has normal shifted or is the metric broken? Swedoe argues the former and I agree with that interpretation. Normal is higher. Barring some catastrophic impact on civilization, I don’t expect CAPE to go to 10 or 8 or 5 for any length of time. I accept that it has trended higher, for good reasons, over the past 25 years. To my mind that does not mean it is useless. It might mean, however, that today’s 33 isn’t yesteryear’s 33, and we shouldn’t treat it the same way.

Compared to other metrics, such as market cap to GDP, prices are at historical highs. I would consider the sum of all evidence rather than just discounting the one that gets the most press.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 7:43 pm

letsgobobby wrote:
Fri Sep 21, 2018 7:20 pm
HomerJ wrote:
Fri Sep 21, 2018 6:58 pm
letsgobobby wrote:
Fri Sep 21, 2018 5:39 pm
Also, CAPE has not been above its long term average since 1992. For about one month in March 2009, it was below its long term average. 8-)
yeah 1 month out of 312... Seriously man, come on.
I’m dead serious. It was a great buying opportunity. The intra-month low was around 12, 25% below its long term average and close to 50% below its 20 year average.
That wasn't the point when I brought that up. The point was that CAPE has been 'high' for nearly 27 years for the U.S., yet real returns have been above average. Whether 2008 was identified as a good buying opportunity or not is completely beside the point. The only answer I've heard from CAPE advocates is that returns have been above average because we're in a super-duper-inflated valuation environment that will eventually come crashing down. Shiller himself played that card for a long time, but he seems to maybe be finally backing down from that position lately.
HomerJ wrote:
Fri Sep 21, 2018 6:58 pm
The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression. Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value” (see the black circle).

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken. There is no other way to coherently explain why the metric has consistently failed to migrate towards its long-term average, or spend any amount of time below it, as it should do every so often in bear markets.
And that was written FIVE years ago.

http://www.philosophicaleconomics.com/2013/12/shiller/
I agree something needs to be explained. But which is it? Has normal shifted or is the metric broken? Swedoe argues the former and I agree with that interpretation. Normal is higher. Barring some catastrophic impact on civilization, I don’t expect CAPE to go to 10 or 8 or 5 for any length of time. I accept that it has trended higher, for good reasons, over the past 25 years. To my mind that does not mean it is useless. It might mean, however, that today’s 33 isn’t yesteryear’s 33, and we shouldn’t treat it the same way.

Compared to other metrics, such as market cap to GDP, prices are at historical highs. I would consider the sum of all evidence rather than just discounting the one that gets the most press.
Higher may be the new normal, but again, that doesn't explain real returns over the last 27 years.

I truly believe that CAPE 10 is little more than statistical artifact that Shiller 'discovered' that has something to do with future stock returns but not nearly as much as it appeared to according to the data used to create it.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by JBTX » Fri Sep 21, 2018 8:09 pm

You kind of have to look at earnings too.

https://www.economicgreenfield.com/2017 ... -17-09123/

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 8:13 pm

JBTX wrote:
Fri Sep 21, 2018 8:09 pm
You kind of have to look at earnings too.

https://www.economicgreenfield.com/2017 ... -17-09123/
From that link:

Image
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by JBTX » Fri Sep 21, 2018 8:27 pm

willthrill81 wrote:
Fri Sep 21, 2018 8:13 pm
JBTX wrote:
Fri Sep 21, 2018 8:09 pm
You kind of have to look at earnings too.

https://www.economicgreenfield.com/2017 ... -17-09123/
From that link:

Image
Yes that is what I posted.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Fri Sep 21, 2018 8:29 pm

willthrill81 wrote:
Fri Sep 21, 2018 7:43 pm

Higher may be the new normal, but again, that doesn't explain real returns over the last 27 years.

I truly believe that CAPE 10 is little more than statistical artifact that Shiller 'discovered' that has something to do with future stock returns but not nearly as much as it appeared to according to the data used to create it.
Vanguard said it explained 40%; what do you say? 20%? 5%?

I think CAPE explains at least half of future returns when it is at extreme valuations (say top or bottom quartile), but what’s less predictable is over what period of time. In other words it eventually explains more than half of future returns, but it may do so over a 3 year period, a 10 year period, or a 12 year period. Those are still actionable in my mind. For example if I interpret CAPE to be in the top decile, I will expect returns to be in the bottom decile at some time in the next decade and a half. Whenever it happens that low returns have occurred - and that will typically happen because earnings will have fallen but prices will have fallen even faster - then CAPE will normalize and I would anticipate normal (range) returns again. When stocks went vertical in 1996, it took 12-13 years for all the excess to be wrung out of the system. The fact it didn’t occur at precisely 10 years doesn’t mean anything to me. I simply played the odds and mostly stayed out of US stocks for the entire period. When stocks got cheaper, I started buying more. I bought so much in Oct 2008-May 2009 that I have not had to buy any more since - the growth alone, coupled with my ongoing contributions to fixed income, has kept my 60/40 allocation in balance.

By the way this is all written into my IPS so it’s not like I’m completely winging it.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Fri Sep 21, 2018 8:47 pm

letsgobobby wrote:
Fri Sep 21, 2018 8:29 pm
willthrill81 wrote:
Fri Sep 21, 2018 7:43 pm
letsgobobby wrote:
Fri Sep 21, 2018 7:20 pm
HomerJ wrote:
Fri Sep 21, 2018 6:58 pm
letsgobobby wrote:
Fri Sep 21, 2018 5:39 pm
Also, CAPE has not been above its long term average since 1992. For about one month in March 2009, it was below its long term average. 8-)
yeah 1 month out of 312... Seriously man, come on.
I’m dead serious. It was a great buying opportunity. The intra-month low was around 12, 25% below its long term average and close to 50% below its 20 year average.
That wasn't the point when I brought that up. The point was that CAPE has been 'high' for nearly 27 years for the U.S., yet real returns have been above average. Whether 2008 was identified as a good buying opportunity or not is completely beside the point. The only answer I've heard from CAPE advocates is that returns have been above average because we're in a super-duper-inflated valuation environment that will eventually come crashing down. Shiller himself played that card for a long time, but he seems to maybe be finally backing down from that position lately.
HomerJ wrote:
Fri Sep 21, 2018 6:58 pm
The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression. Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value” (see the black circle).

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken. There is no other way to coherently explain why the metric has consistently failed to migrate towards its long-term average, or spend any amount of time below it, as it should do every so often in bear markets.
And that was written FIVE years ago.

http://www.philosophicaleconomics.com/2013/12/shiller/
I agree something needs to be explained. But which is it? Has normal shifted or is the metric broken? Swedoe argues the former and I agree with that interpretation. Normal is higher. Barring some catastrophic impact on civilization, I don’t expect CAPE to go to 10 or 8 or 5 for any length of time. I accept that it has trended higher, for good reasons, over the past 25 years. To my mind that does not mean it is useless. It might mean, however, that today’s 33 isn’t yesteryear’s 33, and we shouldn’t treat it the same way.

Compared to other metrics, such as market cap to GDP, prices are at historical highs. I would consider the sum of all evidence rather than just discounting the one that gets the most press.
Higher may be the new normal, but again, that doesn't explain real returns over the last 27 years.

I truly believe that CAPE 10 is little more than statistical artifact that Shiller 'discovered' that has something to do with future stock returns but not nearly as much as it appeared to according to the data used to create it.
Vanguard said it explained 40%; what do you say? 20%? 5%?
The problem with the 40% number that virtually everyone, including Vanguard, tosses around is that it's extremely biased. Of course that number is high or else Shiller wouldn't have proposed CAPE in the first place. It means nothing to come up with a predictive variable after the predicted event has occurred. It's only after a potentially predictive variable is put forth that a genuine test of its accuracy can be determined. The question then is what has CAPE's predictive ability been like since Shiller proposed it?
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Fri Sep 21, 2018 8:58 pm

That’s what I’m asking you: what percent of future returns do YOU think CAPE predicts? You say it’s largely an artifact, I disagree, and my IPS is built around responding to extreme CAPE values. In descriptive terms, for instance, I propose that top decile CAPEs (adjusted for changes in GAAP), predict cumulative real returns of under 1% at some time in the next 15 years. It does not guarantee they will happen, as the range of expected returns is still large; but playing the odds, and planning my portfolio, I would count on returns of that magnitude. In almost all environments that suggests that some other investment will perform better, and - this is important to me - perform better with far less volatility. Thus from 1996-2002 I held 0% US stocks; from 2002-2007 about 25%; by 2009 almost 70%, and 60% since then. My IPS says I should have fewer US stocks now but for the reasons discussed upthread I have opted to ‘do nothing’ as I think CAPE will drop soon (as 2008 earnings drop off - and now I understand why that hasn’t happened yet!), and because current CAPE should be adjusted downward by ~ 15% to make it comparable to pre early 2000s levels.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by stlutz » Fri Sep 21, 2018 11:04 pm

Finally, it is not correct that the 2008 earnings will suddenly drop off and be replaced with 2018 earnings. The multpl web site actually calculates Shiller PE daily and provides tabular data monthly. I believe Shiller's website used to calculate CAPE monthly if not daily but I haven't checked it in a long time. There won't be a cliff effect for these values. And not to be too dense, but for CAPE10 calculated daily, aren't most of the 2008 values already off? In September 2009 CAPE1 would include earnings from September 2008. In September 2018 CAPE10 would include earnings from September 2008.
Actually, it will be a cliff. Schiller uses the index earnings reported by S&P once all companies have reported for the 12 months ending 12/31/2018, which won't be until the spring of 2019.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by stlutz » Fri Sep 21, 2018 11:12 pm

Vanguard said it explained 40%;
"Explained" is always an unfortunate verb to use when one simply does a correlation. Nothing has really been explained by doing that--they've just found a variable that worth further exploration.

For me, CAPE has theoretical issues--why would I consider earnings from 10 years ago to be equally relevant as what companies are earning now? And don't prices move in response to expectations of future earnings?

I think the charts that willthrill had in the OP explain why the market is priced as it is now and they suggest that there isn't some type of irrational exuberance going on. Now, one might think that current earnings expectations are too high. I could make a case for them being so (whether it would be compelling case is a different question :D ). But I don't know that my argument would be, "Earnings 7 or 8 years ago were quite a bit lower than what analysts are expecting next year; therefore the analysts are wrong."

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Sat Sep 22, 2018 12:06 am

stlutz wrote:
Fri Sep 21, 2018 11:12 pm
Vanguard said it explained 40%;
"Explained" is always an unfortunate verb to use when one simply does a correlation. Nothing has really been explained by doing that--they've just found a variable that worth further exploration.

For me, CAPE has theoretical issues--why would I consider earnings from 10 years ago to be equally relevant as what companies are earning now? And don't prices move in response to expectations of future earnings?

I think the charts that willthrill had in the OP explain why the market is priced as it is now and they suggest that there isn't some type of irrational exuberance going on. Now, one might think that current earnings expectations are too high. I could make a case for them being so (whether it would be compelling case is a different question :D ). But I don't know that my argument would be, "Earnings 7 or 8 years ago were quite a bit lower than what analysts are expecting next year; therefore the analysts are wrong."
Very good point. That's pretty much what the 'CAPE over forward PE' crowd is claiming.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Sat Sep 22, 2018 12:31 am

stlutz wrote:
Fri Sep 21, 2018 11:12 pm
Vanguard said it explained 40%;
"Explained" is always an unfortunate verb to use when one simply does a correlation. Nothing has really been explained by doing that--they've just found a variable that worth further exploration.

For me, CAPE has theoretical issues--why would I consider earnings from 10 years ago to be equally relevant as what companies are earning now? And don't prices move in response to expectations of future earnings?

I think the charts that willthrill had in the OP explain why the market is priced as it is now and they suggest that there isn't some type of irrational exuberance going on. Now, one might think that current earnings expectations are too high. I could make a case for them being so (whether it would be compelling case is a different question :D ). But I don't know that my argument would be, "Earnings 7 or 8 years ago were quite a bit lower than what analysts are expecting next year; therefore the analysts are wrong."
I thought it didn’t need to be spelled out, but it has something to do with the fact that earnings don’t change as quickly as expectations of future earnings change; that companies don’t grow as fast as exuberant investors expect them to when optimism is high; that investors are chronically poor at assessing deep risk; that there are some bounds to stock valuations as they relate to GDP/earnings/economic fundamentals; that labor and capital exist in some kind of elastic tension and neither can gain the upper hand for too long; that GDP growth is remarkably sticky. In other words, if I say that earnings today are $100, I can predict average earnings over the next ten years could be $150, or $200, but are very unlikely to be $500, or $0. So the earnings over the last ten years tell me a lot about what earnings will be over the next ten years; not to a decimal point, but to more than an order of magnitude. This is why CAPE10 is more predictive than CAPE1.

Look, CAPE has been litigated repeatedly and I don’t mean to engage again. Maybe I’m one of the few adherents remaining. That wasn’t the point of this thread. I simply wanted to point out that forward PE, which are completely specious and practically made up in many cases, should have even less predictive value than the cold hard cash a company has earned over the last ten years. If I cared enough about this maybe I’d argue some model incorporating both would be best, but you still have the problem of wild inaccuracies in predicted E.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Sat Sep 22, 2018 12:33 am

stlutz wrote:
Fri Sep 21, 2018 11:12 pm
Vanguard said it explained 40%;
"Explained" is always an unfortunate verb to use when one simply does a correlation. Nothing has really been explained by doing that--they've just found a variable that worth further exploration.

For me, CAPE has theoretical issues--why would I consider earnings from 10 years ago to be equally relevant as what companies are earning now? And don't prices move in response to expectations of future earnings?

I think the charts that willthrill had in the OP explain why the market is priced as it is now and they suggest that there isn't some type of irrational exuberance going on. Now, one might think that current earnings expectations are too high. I could make a case for them being so (whether it would be compelling case is a different question :D ). But I don't know that my argument would be, "Earnings 7 or 8 years ago were quite a bit lower than what analysts are expecting next year; therefore the analysts are wrong."
What does the chart really say?

We are less exuberant than 2000.

We are a little more exuberant than 2007.

We are much more exuberant than 2009.

I think CAPE says the same thing.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by james22 » Sat Sep 22, 2018 10:27 am

Really doesn't matter what the chart says if forward P/E is not actually correlated with realized, subsequent market returns.

That the market takes forward P/E seriously is just a manifestation of Bogle's Iron Law of Investing: In the short run, speculative return drives the market. In the long run, investment return is all that matters.

What of this do you disagree with, Will?

... stocks are a claim to a long-term stream of cash flows that will actually be distributed to investors over time, and that this stream of cash flows cannot be estimated from a single year's earnings number.

The main reason for this is that profit margins vary from year-to-year over the business cycle, and tend to mean-revert over the long-term. Earnings (net and operating) tend to be depressed during periods of economic strain, but when they reflect compressed profit margins, they are strongly associated with above-average rates of subsequent growth over the following 7-10 years.

In contrast, earnings that reflect elevated profit margins are strongly associated with poor rates of subsequent growth. When analysts take earnings figures at face value, and presume to "capitalize" them simply by dividing by interest rates, they demonstrate a Kindergartener's grasp of securities valuation.


http://www.hussmanfunds.com/wmc/wmc100802.htm

RTM?

So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.

https://www.vanguard.com/bogle_site/sp20020626.html
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by KyleAAA » Sat Sep 22, 2018 2:08 pm

IIRC Ben Graham advocated using 3 years worth of earnings to value companies, which in theory seems much more reasonable than 10. I wonder how CAPE3 has performed.

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