U.S. Sector P/E Ratios

Below we highlight one-year charts of trailing 12-month P/E ratios for the S&P 500 and its ten sectors. The red dots highlight where the P/Es stood when the market peaked on October 10th. Since the market is down significantly since October 10th, it's not good to see its P/E higher than it was back then, as that means earnings are declining faster than the price.

Remember when everyone was saying Financials were cheap in late 2007 based on its P/E ratio? That argument didn't hold for too long. Materials and Energy have also seen their P/Es rise, but prices have also risen for these sectors. And unfortunately, we didn't include Consumer Discretionary or Telecom because Discretionary's P/E is in the 100s and Telecom's is negative. Industrials, Health Care, Consumer Staples and Utilities have fortunately seen their P/Es decline slightly, and Technology's valuations have fallen significantly since earnings have held up well for that sector.

Comments

[ETF Investor]

Excellent article. Thanks for posting the charts.

[RSInvestor]

I appreciate the information. However, just using PE to determine relative valuations falls a bit short of the big picture. Especially when it comes to financials. The current interest rate environment sets the stage for financials to blow away (dismal) estimates in 2H 2008.

My thesis is based on the fact that their cost of money, Federal Funds rate and bond rates, are very low. Meanwhile, consumer interest rates have not dropped at all. A 30 year mortgage is the same today as it was 12 months ago, when the Funds rate was 300 basis points higher. This has to widen margins for banks still lending money.

On a price/book basis, the financials are attractive. I do agree, though, that strictly looking at earnings, financials are toxic.