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S&P 500's PE Ratio of 139 Isn't Sustainable

Sep. 15, 2009 12:25 PM ETSPY, IVV34 Comments
Hans Wagner profile picture
Hans Wagner
The S&P 500 PE ratio is an important determinant of the value of the stock market and the trend of the S&P 500. Historically, the S&P 500 PE ratio has a median of 15.7. Today, the S&P PE ratio is 139 based on a closing price of 1,044 on Friday, September 11, 2009. This assumes the trailing earnings for the S&P 500 companies as reported by Standard & Poor’s for the four quarters ending June 30, 2009. A PE ratio at 139 is not sustainable. What is a reasonable PE ratio for the S&P 500 given our current situation?
The S&P 500 PE ratio reflects the performance expectations of the stock market. In the last three quarters, the PE ratio has leapt higher with the plunge in earnings of the S&P 500 companies. The fall in earnings overcame the drop in the value of shares in early March 2009.
Even with the recovery in the markets since the lows in March, the S&P 500 PE ratio remains very high as the trailing four quarters of earnings is so low. According to data from Standard & Poor’s on the S&P 500, as reported earnings for 99% of all reporting companies, creates an S&P 500 PE ratio of 122.41 as of June 30, 2009. The trailing four quarters of earnings was $7.51. Two years ago the as reported earnings for the S&P 500 companies was $84.92 for the quarter ending on June 30, 2007. The S&P 500 PE ratio was 17.70. This plunge in earnings is what caused the S&P 500 PE ratio to rise so high.
As shown on the chart below the S&P 500 PE ratio rose to 122 for the quarter ending June 2009. The estimates through the end of 2010 are from Standard & Poor’s for earnings and

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Hans Wagner profile picture
Hans retired from his business career at 55 and pursued his passion to help others achieve financial independence. A graduate of the US Air Force Academy with an MBA majoring in Finance from the University of Colorado, Hans continued to invest throughout his career in the US Air Force, Bank of America, Coopers & Lybrand, and working for Ross Perot. Since he did not come from the investment-banking world, Hans has a better understanding of the needs and issues individual investors face as they strive to secure their financial future. Hans Wagner started investing at an early age and was able to retire at 55. He founded Trading Online Markets LLC ( http://www.tradingonlinemarkets.com/) as a way to help others achieve financial independence. He seeks to help other individuals achieve their financial goals and welcomes questions at any time. The idea for this site came from our children and their friends as they graduated from college and began their careers. While they were successful in school, they are unprepared to invest wisely and create the wealth they will need to buy their first home, see their children through college (it will cost much more then), and have a sufficient nest egg for retirement (pensions are going away and Social Security will be in trouble). Ten percent of the revenue from the site is to educational organizations that seek to help the world's disadvantaged overcome poverty. Visit his site: TradingOnlineMarkets ( http://www.tradingonlinemarkets.com/) Email Hans at hans.wagner@tradingonlinemarkets.com (mailto:hans.wagner@tradingonlinemarkets.com)

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