A Closer Look At P/E Ratios

Oct. 05, 2018 10:00 AM ET11 Comments5 Likes
Ronald Surz profile picture
Ronald Surz
1.94K Followers

Summary

  • The total market P/E has historically been a reliable indicator of overpricing, and the odds of a correction.
  • A closer look reveals that the P/Es of growth stocks may provide a better warning.
  • Growth stock P/Es at 62 are currently at their second highest level ever.

Many argue that the current level of Price-Earnings (P/Es) is signaling an expensive U.S. stock market that will correct just as other markets have corrected in the past. Here’s the history of total market P/Es back to 1986:

As you can see, most market corrections were preceded by a P/E above 20, except the Growth Bubble of the late 1990s. The US market currently stands at a P/E of 32, which should cause some concern.

A closer look provides some additional perspectives. The following chart shows the P/E histories of the large company Surz Style Indexes.

As you can see, it’s the growth companies that drive up the prices, which has certainly happened this year, with large growth stocks earning 17% versus large value at 4%.

What does this mean?

You might have some ideas that explain why the large cap growth P/E appears to be a leading indicator. Suffice it to say that at the current 62, this level was only exceeded once in the past.

This article was written by

Ronald Surz profile picture
1.94K Followers
Please visit https://babyboomerinvesting.show o I'm author of 3 books: Baby Boomer investing in the Perilous Decade of the 2020s, & 2 books on target date funds I’m smart with 2 Masters degrees and 55 years in financial consulting. I’m semi-retired, and prefer helping my fellow baby boomers rather than playing golf. I’m worried that our country, & most others, is playing with fire in its money printing. I’m here to help – that’s my legacy. spaceI help investors deal with life’s investment challenges, with the objective of enjoying a comfortable long retirement. I’m passionate about questioning and improving upon entrenched stale practices like jamming everyone into cookie cutter model portfolios. That's why I produce the Baby Boomer Investing Show live on Youtube and Facebook every other Tuesday at 10:00 PST. Watch live or replay by searching for "Age Sage Robo" on Facebook or Youtube. Please watch and support our Boomer Investing Show on Patreon ( https://www.patreon.com/user?u=35204315&fan_landing=true ) and visit our SA Blog at https://seekingalpha.com/account/authorboard/instablog . As president of Age Sage Robo (please Google), and CEO of GlidePath Wealth Management, I’m responsible for model development using my patented process . I have more than 50 years of financial service experience and hold a U.S. Patent for a time-tested glide path investment process that helps investors navigate the complicated financial decisions they face as they accumulate and preserve assets for their retirement years. Age Sage & GlidePath use this process to build Target Date, Special Purpose, and Life Span Portfolios that are tailored to the specific requirements of clients. My extensive financial career began at A.G. Becker Pension Consultants where I advised on the investment policies of several trillion dollars of retirement plan assets. After Becker I started my own consulting firms that developed innovative services for investors and the financial advisors who serve them. I’ve earned a BS and MS in Applied Mathematics from the University of Illinois and an MBA in Finance from the University of Chicago. I am author of the book "The Remarkable Metamorphosis of Target Date Funds" and co-author of "The Fiduciary Handbook for Understanding and Selecting Target Date Funds"
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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