Dow Jones Industrial Average and S&P-500 Coverage | 1 of 3
Current P/E Ratios vs Historic Norm
Elliott Wave Plus
According to the history books, the stock market is currently in severe overvaluation territory. What does historical data tell us about stock market valuation today? Let’s talk about price-to-earnings ratios. The price-to-earnings ratio (P/E ratio) is the ratio used for valuing a company that measures its current share price relative to its per-share earnings. This is used to determine the relative value of a company’s shares [Investopedia.com]. Today, the P/E ratio for the S&P-500 index is around 45. This is an unusually high number. Historically, the P/E ratio for the S&P-500 pivots around the 14 to 15 range. This is otherwise known as traditional fair value. So the market currently trading at three times historical fair value. History tells us that it can’t sustain this high of a multiple for long.
Here’s a couple fun facts:
- The current ratio is higher than the peak of the 1929 “roaring twenties” high.
- The only higher P/E ratio on record at the peak of the “dot com” bubble in 2000.
If there was no change in the profitability of companies today, but the market was trading at fair value, the S&P-500 would be at 1,300, not 3900. Does this mean the market is going to come crashing down to fair value in the blink of an eye? That’s not what we are expecting, at least not this year. Watch this video of Sid’s Elliott Wave analysis on the DJIA and S&P-500. This is part 1 of 3, so be on the lookout for future videos and updates!
– Sid Norris & Andrew Norris
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