How This Market Recovery Stacks Up: Corporate Profits and P/E Ratios

by: TickerSense

Last week, we highlighted how the only other period where the S&P 500 had a weaker performance following the end of a recession was in 1970. We also began a series of posts which highlight how this recovery stacks up against other recoveries based on a variety of economic and market indicators. Today we continue the series with a look at two more indicators -- corporate profits and PE ratios.

The chart below shows that of the seven recoveries since 1962, corporate profits have risen at a faster pace than any other recovery since 1962. Clearly investors should be bullish, right?

One way to guage investor optimism is to look at the market’s PE ratio during each period. While there can certainly be other factors at work, generally speaking, high P/E ratios indicate that investors are willing to pay more for every dollar of earnings (optimistic), and low P/E ratios indicate the investors won’t pay up for earnings (pessimistic). As shown in the chart below, investors must have gotten up on the wrong side of the bed at the start of this recovery, and have been in a sour mood ever since. Since November 2001, the P/E ratio on the S&P 500 has not only grown at a slower pace than any other expansion, but it has actually declined!