P/E vs S&P 500 (50 Years)

As promised, today brings us to the 4th in our series of charts:

P/E vs S&P500
click for larger chart

courtesy of Mike Panzner, Rabo Securities


I’ll get into the significance of what this means to the markets later, but for now, note where the P/E is over the median, and its impact on market performance.

Stocks, while not terribly expensive, can not be called cheap by historical measures. An even more discouraging mesure on this comes from Clifford Asness of AQR Capital Management (via Mark Hulbert).  He calculated the P/E ratios for the entire market for the 1871-2003 period at ~11. That implies stocks are even less cheap (or more expensive) than the past 50 years implies.

Regardless of whether you take the 50 year or the 132 year perspective, the theory of Reversion to the Mean implies that stocks are likely to become cheaper so as P/Es revert. And one shouldn not expect the market to stop at fair value, as we have seen, the tendency is to overshoot on both sides.


Our 3 prior Charts:

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What's been said:

Discussions found on the web:
  1. Erik Alberts commented on Dec 30

    My understanding of stock market performance is that over the long run, the return on stocks should be equal to earnings plus dividends, plus a “valuation factor” that the market places on the two (P/E or P/BV). If P/E’s are getting closer to the 50 year median, perhaps we can expect returns to more closely match earnings and dividend growth going forward (assuming stocks as an investment don’t fall out out of favor with investors). I’m not sure one can use the 132 year median P/E of 11 as the reversion level, given the improved information around stocks since the Securties Exchange Act of 1934 – better information means investors are willing to pay more (higher P/E).

  2. Michael C. commented on Dec 30

    Maybe the PE should be normalized with respect to interest rates?

  3. B commented on Dec 30

    I read Grantham’s and Robert Shiller’s commentary and research on a regular basis. Posting an article here which actually quotes both along with the current risks including many untested theories such as hedge funds help stabilize the markets and reduce volatility as well as the untested proliferation of so many derivatives and, specifically, the leverage using these derivatives that many hedge funds employ. Can you say LTCM multiplied?

    Interesting read along the lines of your chart of PEs. Btw, my work shows the S&P PE in the late 70s to 1982 bottomed below 9 on numerous occasions. Is that chart operating earnings or reported EPS? Those PEs seem off. In any event, it makes your point even more pronounced as it appears the chart above shows over 15 around 1982.


    And for those who think earnings will always save you, EPS compounded at 11% throughout the 70s and at 12% through 94-2000. Hence, the 70s actually had higher earnings growth over a longer period of time but the PE on the S&P ended that time frame significantly lower than it started. The 80s & 90s wasn’t about PE growth. 4-500% of the cumulative gains during that time were due to PE expansion. PE expansions don’t typically happen in commodity booms with a weak dollar. PEs have contracted every single time.

    I still think next year will end on an up note but……….predicting is for Nostradamus…..and I’m not betting on it.

    Anyone on here familiar with the Hindenburg Omen? Watching the market action? Don’t count your chickens. This is a very dangerous market right now and investors are very apathetic right now.

  4. Michael C. commented on Dec 30

    As I understand it, the Hindenburg Omen was triggered some time in Sept. But the market went on to rally from its bottom in Oct into the beginning of Dec.

    This market is not without problems. But those crash indicators need to be taken with a grain of salt, a few extra grains than the more traditional indicators…

  5. B commented on Dec 30

    Well, you surely don’t invest based on such an objective and highly anecdotal result.

    But, those situations only arise in times of elevated risk. And two patches in three months? That dpesn’t happen in strong markets. The HO simply states that risks are elevated and the potential exists within 30 days for an ugly patch or worse. Cooks Cumulative Tick…..same situation in August and today. Maybe anecdotal but with elevated risk, only a fool would be committing new money here. Because the last time the HO arose, the market was instituting trading curbs for the first time since this bull run began. ie, Pleasant October.

    The bulls have been running the market up in the AM and selling in the PM for three weeks. They are likely exiting from the looks of the underlying action and the fools will likely be left holding the bag.

    If that situation comes to pass, don’t assume the bulls can bounce the market as they did in November. Why not? The smart money in the futures markets have taken out their biggest bets the S&P is going to crater since December of 04. They aren’t usually wrong. Loosely interpreted, they are lining up to take your money. Just a few grains of salt. Enjoy the ride.

  6. Mike commented on Dec 30

    Crash indicators should be followed only by people who
    have a good track record in the area.

    Brinker, Sullivan & a few others are the only market timers
    who have been making the right calls for the last 20+ yrs.

    I plan on going to cash when the “BrinK” gives the signal. Judging from his newsletters I’d say it’s coming up soon.

    Maybe Barry too – no offense Barry.


  7. PC commented on Dec 30

    I am in the secular bear camp and I respect Barry’s work and effort in proving his case. However, it’s best not to trade one’s opinion in markets as John Maynard Keynes once said, “Markets can stay irrational far longer than you can stay solvent.”

    Barry, wishing you a Healthy and Prosperous New Year.

  8. Mhashe commented on Dec 30

    Here’s a thought. CPI numbers are B.S. Real inflation is probably around 11% ( yeah, that’s right, more rate hikes).

    Therefore if real inflation is @ 11%, current P/E ratios are actually historically on the low side. Therefore using the above “reversion to mean” hypothesis, stocks have further upside potential. Someone correct me if my logic is flawed.

    Personally I am short-term ( upto 3rd Qtr of 2006) bullish. Real estate bubble should collapse around then as earnings and employment numbers get hit with housing slowdown.

  9. A Dash of Insight commented on Dec 30

    P/E vs S

    Take a look at this great chart of P/E versus the SP 500. It does a wonderful job of setting up the valuation question. You can see what is wrong with it, even without looking for a better model. The

  10. Lord commented on Dec 30

    Not sure there is a mean to revert to. Dividends in the 19th century were around 6%, and P/Es for small businesses have always been about 3. Now what we need is another revolution to get growing again as high P/Es represent growth expectations.

  11. B commented on Dec 30

    If inflation was 11% and true rates were 13%(near neutrality), you could expect a haircut of approximately 40% or more in equities using an IBES, Ford or similar type of valuation model. (Generally accepted as reasonably accurate) The Fed’s Fair Value calculation (Forward 52-Wk EPS divided by the yield on the 10-Yr Treasury) yields a target of 1876 on the S&P. The Fed’s FV is somewhat simpletonian and generally not considered accurate for modeling or predictive purposes.

    The question becomes why would anyone want to own equities with the risk involved at today’s premium when you could take out a CD or bond paying 13%. (I’d lock up every dollar I could until retirement at that rate.)

    Inflation leads to lower PEs in the equities market because the alternative, risk free investment drives down the risk premium people are willing to pay for equities………which comparatively right now using IBES valuation models is undervalued by as much as 20-30%. BUT, at the top of the earnings cycle and the start of a new, more inflationary world, achieving those valuations ain’t likely to happen without an equities haircut first, if it is to happen at all in the near future.


  12. Mike Long commented on Dec 31

    I think the P/E chart, while very interesting, sparks more questions than answers. If you drew an increasing wedge from around 1980, from trough to trough and peak to peak, it would seem like P/Es are about ready to go through the roof. Also, there seems to be some departure from the period before 1980 where the P/E and market seemed much more correlated. Maybe something else is affecting the market and P/Es, like easy credit or money supply or low inflation, and should be more the focus of what will drive the market &/or P/E in the future?

  13. The Big Picture commented on Jan 2

    P/E Expansion and Contraction

    Last week, I showed a 50 year chart of the SP500, focusing on the P/E over that time period. Today’s chart covers the same issue, only we focus on the 1982-2000 Bull market. Some people argue that P/E expansion wasn’t all that significant; they say it …

  14. At These Levels commented on Jan 2

    Some Last Week Of Trading

    I find it interesting that everyone assumed, including yours truly, that in a flat year the last low-volume week of the year would be up. It isn’t. It will cover one more model I have that was screaming duck since Tuesday, but after the close

  15. Sue commented on Jan 17

    What is the mathematical model used for the S&P 500?

  16. JoshK commented on May 30

    Just curious, where did you get the S&P PE chart? I can’t bberg to go back that far. Their tech support says its a bug.

  17. Bill commented on May 30

    According to Bianco research approximately 42% of S&P earnings came from finance activities. In additon, the Finance weighting in the S&P is north of 20% so now that the yield curve is flat what can we expect for an encore? Will Home Depot, Walmart and other retailers all become banks and issue credit cards once the mortgage bubble bursts in ’07?


  18. Mike Fujii commented on Feb 5

    Take out the P/E during the bubble period of ’00 from your median calculation and you get an even lower historical median p/e – boding even worse for current multiples.

  19. Tom commented on Apr 6

    hi i would like to know how i could study historical Price to earnings charts agianst market conditions

  20. William commented on Apr 6

    I had the privalage to learn from Thomas Victor Winterburn
    private equity professional, in basic terms P/E would be looked at, a look at the economic climate would be used as a process of elimination to narrow down certain stocks with in industial sectors that are vunrable or able to capitalise on market changes and then an in depth look at corporate strategy and fundemental options avalible to manegment to engage apon to either hedge them selves increase market share or thrive on would be checked and then a common sense look at what is practical for managment to do at this stage and its effect on the movement of its stock is how the trades will be spread

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