P/E Ratio Now Higher Than A Year Ago
One way of looking at this is that because of the decline in earnings and the recent stock price rally, the P/E ratio is actually higher than a year ago. Yesterday, the S&P 500 closed at 929, while the close on May 9 2008 was 1388, a 33.1% decline. Which is to say, relative earnings, stocks are about 5% more expensive than a year ago. And earnings for Q1 2008 wern't exactly very impressive, nor were valuations low at that time.
Valuation levels look a lot more attractive if you look at the Graham P/E, which is calculated using the average level of profits during the latest 10 years, unlike the regular P/E which is only based on current earnings. As the "E" in the Graham P/E moves up and down a lot slower than the "E" in the regular P/E, stocks look less expensive using that method. The Graham P/E is currently at 16, roughly equal to the historical average, but way above the levels typically seen during deep cyclical slumps.