SP500 PE is still above average 3/28/2020

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SemiRetire
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Joined: Fri Dec 20, 2019 5:44 pm

SP500 PE is still above average 3/28/2020

Post by SemiRetire »

Price to earnings ratio stands at 19, SP500 is circa 2540.

When I was taking econ finance 1988 the average SP500 PE was 12.

The “new” average SP500 PE is 15 given the great stock performance since 1982ish.

The market is still above average in valuation, based on earnings that are preCovid shutdown of world economy, which means is one tries to use future not trailing earnings for PE, the market PE is even higher.....

So far we have not done anything unexpected right? To me the drop has to happen at some point, 12 times earnings seems fair to me valuation wise.

1/12 = 8.3 percent return, for every 12 dollars invested, you earn 1 dollar a year.

1/15 = 6.6 percent return

I do not fundamentally “get” that the stock market is “down” when it’s still above average.

19/15 means the market has to fall 25 percent still just to hit the “new” average PE of 15.......

19/12 means it has to drop 58 percent from here to hit the old average PE, which I thought at lot about (yeah interest rates, bond rates, projected forward, etc etc can be used to justify higher or lower PE averages) back in the day, and 12 being a long term average still makes more sense to me than 15...... ( forgive the rough math)

So to me a further 25-60 percent drop from here would not surprise me at all, we would just be back at the average.

This drop is just expectantly normal to me. If it gets 50 percent worse, that is expectantly normal too.



https://www.multpl.com/s-p-500-pe-ratio
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Noobvestor
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Re: SP500 PE is still above average 3/28/2020

Post by Noobvestor »

Recent earnings data may shift the balance of that ratio significantly. Also, and I'll probably never understand this, but: why are you focused entirely on US markets? They make up about half the global market. Global market P/E ratios are pretty reasonable. US has been on a roll. So I don't know what to say - I don't invest based on P/E ratios, but if I did, I'd certainly not be limiting myself to the US at this point in time. /2 cents
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
invest4
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Re: SP500 PE is still above average 3/28/2020

Post by invest4 »

I was wondering if any others were also turning their attention back to valuations as I saw P/E 10 about to touch 25.

I have some additional funds still to put back to work and was feeling a bit bad as did not reach the next band before the quick reversal upward.

Although I know nothing, have decided to keep still for the moment and see what transpires in the next days / weeks.
SandysDad
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Re: SP500 PE is still above average 3/28/2020

Post by SandysDad »

SemiRetire wrote: Sat Mar 28, 2020 2:51 am Price to earnings ratio stands at 19, SP500 is circa 2540.

When I was taking econ finance 1988 the average SP500 PE was 12.

The “new” average SP500 PE is 15 given the great stock performance since 1982ish.

The market is still above average in valuation, based on earnings that are preCovid shutdown of world economy, which means is one tries to use future not trailing earnings for PE, the market PE is even higher.....

So far we have not done anything unexpected right? To me the drop has to happen at some point, 12 times earnings seems fair to me valuation wise.

1/12 = 8.3 percent return, for every 12 dollars invested, you earn 1 dollar a year.

1/15 = 6.6 percent return

I do not fundamentally “get” that the stock market is “down” when it’s still above average.

19/15 means the market has to fall 25 percent still just to hit the “new” average PE of 15.......

19/12 means it has to drop 58 percent from here to hit the old average PE, which I thought at lot about (yeah interest rates, bond rates, projected forward, etc etc can be used to justify higher or lower PE averages) back in the day, and 12 being a long term average still makes more sense to me than 15...... ( forgive the rough math)

So to me a further 25-60 percent drop from here would not surprise me at all, we would just be back at the average.

This drop is just expectantly normal to me. If it gets 50 percent worse, that is expectantly normal too.



https://www.multpl.com/s-p-500-pe-ratio
I literally have been talking to my friends about the valuation relative to 2019 earnings for weeks. And I have specifically mentioned like you that s&p 500 needs to get to 2000 or below to reflect PE 15 or below.

I started reducing aa before the crash started but admittedly only finished my moves during a few of these dead cat bounces. The last one being this past week

I have now done something I haven’t done in my 30+ years of stock investing.... gotten completely out of the market.

Key question of course is when to get back in?

For me this starts at PE 15 based on 2019 earnings (2020 earnings will be meaninglessly low) and accelerates at PE 12 or below

I can’t hope to find the bottom but I do believe in equities long term. ESP international.
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Noobvestor
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Re: SP500 PE is still above average 3/28/2020

Post by Noobvestor »

So you're waiting for a P/E low that has only been hit once since 1990. That's some real downside ... optimism (is that the right word?!).

What ... do you do ... if it doesn't go that low? Sit on the sidelines for 30 years? I can't quite imagine. Anyway. Good luck?! :shock:
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
Olemiss540
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Re: SP500 PE is still above average 3/28/2020

Post by Olemiss540 »

Market timing is a fool's errand. You have to be right twice and most here have already been wrong the first time (time to sell) and now they are going to have to call the bottom to make up for their losses.

People focused on P/E during a recession seem doubly ready to get hammered as once the market hits recovery, the bounce is going to hit hard and they will constantly be watching for a buy in time.

The time to sell due to P\E was 5 or more years ago, but at that point you have been sitting on the sidelines hoping for a 40% drop just to repurchase at 2014 prices.

Demand drives stock prices in the short term. Mass equity demand will not sit on the sidelines waiting for your personal P\E targets, they will see a rebound and start pouring money into markets driving a rally.

Invest for the long term, dont worry about short term swings. Take actions to limit your decision making if you are prone to anxiety and tinkering. Consider all in one funds for this reason.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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Ramjet
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Re: SP500 PE is still above average 3/28/2020

Post by Ramjet »

Noobvestor wrote: Sat Mar 28, 2020 4:39 am What ... do you do ... if it doesn't go that low? Sit on the sidelines for 30 years?
The right question...
fwellimort
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Re: SP500 PE is still above average 3/28/2020

Post by fwellimort »

Warren Buffett himself said basing the stock market off P/E ratio was a fool's errand and that the real world is far more complicated than that.

We don't live in the same scenario as in the past.
Interest rates are near non existent. Stocks have to be compared to bonds.
And by most measures, stocks ARE cheaper than bonds.

If 10 year bonds gave 3.84%, stocks should have an expected rate higher than 3.84%.
When the same 10 year treasuries are now 0.72%, stocks should have an expected rate higher than 0.72%.

Economics is not so simple to be based off just P/E ratios and all. There is a reason why beating the market is so difficult. We are constantly in new situations.

Berkshire Hathaway on index investing and Buffett saying P/E ratio and all to be a fool's errand
https://youtu.be/Clj-r1Pzu0w
dukeblue219
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Re: SP500 PE is still above average 3/28/2020

Post by dukeblue219 »

Agree that interest rates play into this a lot. I think aside from the question of what the E actually is, expecting a P/E below 20 is a stretch given 0% interest rates on treasuries. That's a 5% risk premium for stocks which is on the high end. On the low side, a 3-3.5% risk premium would support a PE of 30ish.
aristotelian
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Re: SP500 PE is still above average 3/28/2020

Post by aristotelian »

Counterpoint, interest rates are at all time historical lows. With nowhere for money to go, all assets are overvalued so everything should have lower expected return.
fwellimort
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Re: SP500 PE is still above average 3/28/2020

Post by fwellimort »

I hope OP understands that expected investment returns should be looked in respect to other expected investment returns.

The most common asset classes are:
Stock, bond, real estate, gold

If bond, real estate, gold have expected future returns of say 2%, it would not make sense for stocks to have expected future returns of 7% and so on.
Returns should be relative.

Please do keep that in mind.
Every asset class is currently 'overpriced' compared to historical returns. I am more amazed how cheap stocks are when bonds have expected negative returns currently.
GeoffD
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Re: SP500 PE is still above average 3/28/2020

Post by GeoffD »

For a lot of companies, it's pretty likely that PE for Q2/Q3 will be a #DIV0 trap. Price to earnings is backwards-looking. It's the wrong thing to be looking at today.
flyingaway
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Re: SP500 PE is still above average 3/28/2020

Post by flyingaway »

We had many threads arguing that the market was richly valued, not overly valued.
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