Saturday, May 09, 2009

P/E Ratio Now Higher Than A Year Ago

Here it is asserted that the decline in S&P 500 earnings by 36.3% is really good news, because it was supposedly higher than official analyst expectations, overlooking that the only reason for this was that these official expectations had been dramatically lowered just in time before the reports.

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.


Blogger Aki_Izayoi said...

I think this a secular bear market, and it is not cyclical.

Still overvalued according to that model.

6:59 PM  

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