S&P500 P/E Ratio

Market was quiet today after two days of rally. The decline from September 23 high 1080 does not look like an 5 waves impulsive down. But on the other hand, a lot of long term indicators, such as MACD divergence I posted on October 4, suggest that we wait for more evidences to adopt a more bullish count at least at this moment.

I do not have a clear count, I do not count!

We started our new earning season today. So let us step back and take a look at the earnings and PE again. I posted "S&P500 Reported PE = 142" on September 21. The red line in first chart below is the latest Reported PE ratio calculated by Doug Short, based on authoritative data from Standard & Poor's website. Here is the link directly to their Excel file.


Do you still have doubts about how serious the current crisis is? Look at this horrible RED spike on a 140-year time horizon history. "How can the P/E be at a record high after the price has fallen so far?" as I explained: "earnings fell much faster than price"

Because this reported P/E ratio is so horrible, when CNBC was asked to explain the market valuation, they simple answered: "we are not looking at reported PE any more". Then what shall we look at?

Benjamin Graham created another PE ratio, called P/E10, and Robert Shiller has reintroduced this concept to investors. P/E10 is calculated by dividing index price by 10-year average of real earnings. The chart below shows us the P/E10 ratio and 140-year regression line for S&P500 index - the red solid line in the chart is the regression line.


"Over the past several months, the decline from the all-time P/E10 high dramatically accelerated toward value territory, with the ratio dropping from the 1st to the upper 4th quintile in March. The price rebound since March has now put the index in the lower range of the 2nd quintile — on the expensive side."

"A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. "

"to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its ninth year."