Warren Buffet's encouraging op-ed in the New York Times Friday may have inspired some buyers Friday morning, but after a world-wide credit crisis, weakening home prices, and the crumbling of several of the world's most prestigious financial institutions, how much will investors really be willing to pay for earnings. Shown below is the 12 month trailing P/E ratio for the S&P 500, its current level and the 5 year average. The average has been declining since the first quarter of 2004, where it peaked, but this could also be a cyclical signal that earnings will have to become much more robust before buyers are willing to bet on future earnings. A quick recession that's over before it starts (on an announced basis) would be encouraging. In any case, the market's P/E ratio is still above its long-term lows, but below any kind of inflated state and continued healthy earnings (like those of Google (NASDAQ:GOOG) and IBM (NYSE:IBM)) will be a long term positive once the fear leaves the market.
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