S&P 500 Sector P/E Ratios Rise 7 comments
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As shown in the table at right, the P/E ratios of the S&P 500 and its ten sectors have jumped significantly since the March 9th low. As the market has rallied sharply, earnings have not been able to keep pace at all, hence a rising P/E. While P/E expansion is normal during a bull market, at some point investors will need to see earnings catch up. This will result in P/Es stagnating or even declining even as the market climbs. Obviously if earnings don't begin to grow as analysts are expecting, the market will have a tough time remaining in rally mode.
The S&P 500's trailing 12-month P/E is currently at 20.13, up 101% from its level at the market bottom on March 9th. The P/E ratio for the Materials sector has jumped the most since 3/9 at 239%, followed by Industrials (+113%), Technology and Energy (+90%). Interestingly, P/E ratios have risen the least for the Consumer Discretionary, but this is skewed because General Motors was taken out of the index in the middle of the rally, and that caused the sector's P/E to fall drastically.
Finally, the Financial sector remains like a kid stuck in the corner in timeout. The sector was the only one to have a negative P/E on March 9th and it continues to have a negative P/E ratio at the moment.
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I guess us bears are people who can't derive the same level of expectations from the data we've seen as the bullish market participants.
On Oct 08 06:01 PM Stone Fox Capital wrote:
> Why are you even talking about trailing PE? The market trades on
> future earnings and those are starting to move up.
However, a big chunk of Alcoa's rise in aluminum demand was attributed to the increased demand for cars, which of course got a one-time boost from cash-for-clunkers. Car sales since then have fallen 41% month-on-month, that's not very encouraging for Alcoa. Whether the other big blue chips can provide/show revenue growth next week, will determine whether the prices come crashing down along with the P/E ratios.
For more analysis, check out my blog: youngandinvested.com
Low interest rates.
More money pouring into the stock market.
some have been calling it "irrational exuberance"
Federal Reserve is keeping the stock bubble.
Any news is good news(even slightly bad news is good).... retail sales, employment.
Supplyside culture still rules. As Shishar Nigam pointed out, the cash for clunkers program stimulated Aluminum demand and boosted Alcoa's revenues. That program is over and the supplysiders are calling it a failure for being temporary, while arguing that the Bush tax cuts to the rich should be made permanent because they're stimulative. This kind of top down think is now the culture and the middle class is under stress millions are falling into poverty.
The ones who have ridden the inflation wave which started when Nixon let the dollar float freely, that is some baby boomers and the Korean war generation have lost a huge portion of their stock portfolios and real estate equity. They are too old to gamble and will overweight bonds and CDs. They can also see how extreme the political culture has become which compounds the risk aversion.
Anything the baby boomers do has an effect on whatever market they enter. When they all opened 401Ks and IRAs P/E ratios surged, we are now entering the decades when they will shift more assets to bonds. If inflation kicks in they will buy TIPs and precious metals (they are already driving up demand in metals markets). Over the next ten years companies, even growth companies will have to pay dividends or issue preferred shares to attract these people.
What we are seeing now is a liquidity driven rally with low volume fuelled mostly by pros. Nobel laureate Bob Lucas recently said he was all cash in his 401K, there are millions of folks like him and they don't want to get into a roller coaster, they want a nice slow ride that pays dividends or interest.
I sold out most of my long positions at the beginning of September. I plan to start my short position tomorrow.
Looking at the P/E ratios by industry is very revealing... It seems fairly clear that the market has already priced-in a substantial recovery, particularly in manufacturing... (lots of luck with that!) And I'm surprised that healthcare is still relatively 'affordable' as an investment.
All the talk about the aging population becoming averse to equities is quite true from my perspective (watching my parents, I can see minimizing risk and protecting wealth is job #1) and I can imagine the demographics pushing bonds over stocks in the years ahead; indeed, as you get older you want stability and predicatable income... I think financial advisors are going to have a tough sell getting the Buick LaSabre crowd into the stock market in any numbers over the next decade.