S&P 500 Historical Trailing 12-Month P/E Ratio

The trailing 12-month P/E ratio recently reached its highest level since February 18th, 2004. As shown in the first chart below, since bottoming at 16.42 on August 15th, 2007, the P/E ratio has risen 43.3% to 23.53. P/Es typically expand when the market rallies and contract when the market declines.

In recent years, however, the trend has reversed. From 2004 to 2007, earnings expanded at a faster pace than price, even as the market rallied. Since the market peaked in late 2007, however, earnings have slowed and P/Es have risen sharply.

click to enlarge

A chart of P/E ratios going back to 1960 highlights the massive expansion in valuations from 1980 through 2000, which culminated in an extremely high ratio caused by the tech bubble. The historical average since 1960 is 17.87.

Comments

[Irrational Markets]

"In recent years, however, the trend has reversed. From 2004 to 2007, earnings expanded at a faster pace than price, even as the market rallied. Since the market peaked in late 2007, however, earnings have slowed and P/Es have risen sharply.".... Yes, it means low or insignificant correlation or non static correlation, totally useless

[locke]

In other words, stocks were really overpriced in 2000.

[CrossProfit]

Mr. NonSense,

It means that the DJ index will remain stagnant for 2008 if you adhere to charting philosophy.

I would agree that the information is very general and does not offer the investor any insight to a particular sector or stock, however, this is precisely what the author meant for it to be, unless you play the index etc. Obviously you don't.

Others do find general trend information useful. Not every article on SA is for all and we filter as well. If you don't like Bespoke tidbits, then skip them - found your comment to be insignificant and totally useless! :)

CrossProfit

[Irrational Markets]

Mr. CrossProfit,

I can't claim that I know with "precise certainty" what the author meant, you can so you must know something more than I do.
My point was that the statistical correlation was weak at best and for you imply that the index will remain stagnant, based on what you read on this post, is overreaching.
If you believe that markets are unpredictable by nature, than this type of analysis is not only useless but dangerous even. If you believe that trailing P/E ratios can indicate the general direction of the markets, best of luck to you.