“When an inflation overlay is included, P/Es don’t look as expensive”
The U.S. equity strategist at S&P Capital IQ suggests that one must include low yields and low inflation rates when determining if stocks are expensive. The chart above shows average price-earnings ratios for the Standard & Poor’s 500 Index since 1948 at five ranges for the consumer price index. (GAAP Earnings based on quarterly data).
Year over year inflation rates of less than 1.5 percent has an S&P 500 average P/E of 22.5; its currently trading at a P/E of 21.3.
Earnings based on methods other than GAAP also make stocks look cheaper, according to the report.
Stovall also cited data showing the S&P 500 ratio was 18 percent higher than the average regardless of CPI. The S&P 500 ended last week at 17.8 times operating earnings, which exclude unusual items. The ratio is 16 percent lower than the GAAP reading.