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S&P 500 Price Earnings Ratio (Long Term Chart) at Trader’s Narrative

Yesterday, while meeting with Gordon Brown, President Obama said:

What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it

While cheerleading the US economy and stock market is part and parcel of being the president, that is a fairly accurate description of current valuation:

SP500 PE ratios long term chart
Source: Prof. Robert J. Shiller

And while some are pointing out a dichotomy between Obama’s pronouncement and his advisor Buffett’s description of the US economy as being in “shambles”, there really isn’t a conflict with the two views as long as you realize that the economy and the US market are two different things.

In any case, the data for February and March 2009 are an estimate only and take us down to 12 - which is without an argument a very low P/E Ratio. But not as low as we’ve seen the price earnings ratio go.

In August 1982, the PE Ratio dropped below 7. And in both July 1932 and July 1921 it went below 6. To see that scenario again, the S&P 500 would have to drop another 40-50% to the 430-360 level (assuming earnings miraculously stay the same).

The only time that the PE Ratio has dropped as precipitously as in this bear market was in the aftermath of the 1929 bull market top. At its zenith in 1929, the PE Ratio was only approaching 33 while in the 2000 market top it reached 44.

Finally, I should mention that this isn’t necessarily the way that others calculate PR ratios - Shiller methodology smoothes out the data over 10 years to remove short term volatility.

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23 Responses to “S&P 500 Price Earnings Ratio (Long Term Chart)”  

  1. 1 Rod Hardener

    It’s important to add interest rate and inflation contexts to any narrative of historic P/Es. In 1982, headline CPI averaged above 9% and the 10 year treasurys yielded over 13%. In the current environment one could argue that we are dealing with historically “deflated” earnings.

  2. 2 Eric

    So The Messiah is a big time market analyst now, c’mon. He doesn’t even know the P in PE ratio is Price.

  3. 3 Mr. Sparkle

    The notion of valuation is a prickly one to me since you have to identify which source of EPS data you are using - reported or operating. Shiller’s data uses reported EPS and operating EPS seems to be a creation of modern accounting and analysts.

    The current PE(ttm) using reported EPS is a bit over 50! Using operating EPS, it is around 18.

    If you break down Shiller’s data (again, reported EPS) into quarters and then calculate PE(ttm) the average from 1950 - Dec 2008 was 16.59. Since 1988 (the data that S&P has available on their site), the PE(ttm) based on operating EPS is around 19.

    That doesn’t seem cheap to me. Worse, the dividend yield is still below historical average even as trailing yield has crept up with the cratering of the index. The problem is that significant slashes to dividends are being announced every day. I’m inclined to think that SPX yield on a trailing basis is going to have to reach 5% before investors think that there is enough of a buffer to achieve 3% going forward.

    My own belief is that the market is going to emerge at some point with an outlook that people will invest for yield, not capital gains, so consider that as my bias. Finally, nobody really knows what a “fair” or “correct” multiple is.

  4. 4 Y.W


    where can I find Shiller’s data?


  5. 5 Mr. Sparkle
  6. 6 Y.W

    Thank you Mr. Sparkle !!

  7. 7 antonis

    On the march lows p/e was 50??? How much is it now?

  8. 8 Babak

    antonis, no in March 09 the PE was 13 and now it is almost 16 (due to the price jump)

  9. 9 antonis

    I read the post by Mr. Sparkle and it says the p/e is much higher.

    The p/e you are telling me is from the last years earnings?..
    is it operating or reporrted earnings? thanks

  10. 10 Babak

    antonis, you can get Shiller’s data here and see for yourself.

  11. 11 Babak

    you’re welcome

  12. 12 antonis

    Thank you, that’s great!

  13. 13 wayne

    regarding factoring in interest rates. I recently did a regression analysis to determine the expected PE as a function of the T Bill yield and determined that
    Expected PE = 100/(2.2 0.7*Tbill Rate)
    Using this equation you get the following expected PEs as a function of interest rate

    TBill Expected PE
    0% 45.5
    5% 28.1
    10% 10.8

    my study was constrained by the fact that I only had data going back to 1970, I used 12 month trailing earnings for E.

    But using this estimate, we could assume a fair value PE for the market to be 43-45 with Tbills yielding near zero. Problem is that last 4 quarters, earnings have been all over the map. Many argue that the 4th quarter negative earnings were an anomaly. If you took the first quarter earnings of 7.81 and assumed that was a good guess for next 4 quarters. The current PE would be more like 28, much more reasonble. The deal here is who has the best instincts of what earnings are going to be in 09? estimates are everywhere.

  14. 14 Babak

    wayne, yeah, we could actually see negative earnings for the first time. You can use Shiller’s data, it goes back much further than the 1970’s - just keep in mind that he does some funny things like averaging out stock prices over the month.

  15. 15 wayne

    Yea, I looked at Shiller’s data. The problem I have with his approach is that he uses trailing 4 quarter earnings and then smooths with interpolation methods to get monthly. If you want to smooth to monthly, why not work with quarterly data?

    For an example of the problem with working with trailing 4 quarters data, the 4 quarter PE is going to look sad until you drop this -25, that we had in the 4th quarter of 08 off at the end of 09. Then the PE based on trailing 4 quarters is going to all of sudden go from 100 to 25. Shiller and others try to deal with this by calculating a PE based on some normalization of 10 year earnings, with the idea that every thing reverts back to the mean. I am of the opinion that this time, the economic process may have shifted and I don’t really want to try to predict the value of the market using earnings data from 5 years ago

    I am of the opinion, that all of us numbers guys who massage past numbers to try to extrapolate into the future are probably behind the curve. The guys with the advantage are the ones who can look at the fundamental changes in the economy and use insight to estimate what future earnings are going to be based on knowledge of the process.

    Unfortunately, I fall into the category of one of those number guys who can only work with past data but feels like working with quarterly earnings data is the better approach. Standard & Poors has the quarterly numbers listed back to 1988 on their site. If anyone knows where I can get quarterly beyond that, I would like to get my hands on it.

    Thx for sharing

  16. 16 Mr.Sparkle


    I haven’t looked at this in a while - other things have come up - but as I recall, you can test Shiller’s interpolated monthly values to see how they match up against S&P’s quarterlies for the periods when both are available. And again, if I remember correctly, they do match up reasonably well. So you can go back and create a quarterly series based on Shiller’s data which is what I had done.

    Isn’t it Siegel that always tries to use the “normalized” PE? I kind of toss that into the same basket as the “Fed model” for equity valuation, although I suppose both have their adherents and as we all know, if enough people believe something it can become “true”. Someone far smarter than me has dismantled the Fed model (though the name escapes me) and I know that Siegel has his acolytes.

    Your last paragraph rings true for me. But during the equity price destruction that occurred I had repeatedly written that multiples do not have to hit single-digits and if the last recession was any guide, never would before pps recovery. Bottom line, there is no “correct” multiple - it is whatever the market feels like it should be. Subjective truthiness or something like that. Perhaps someone that knows logic can provide the correct term.

  17. 17 wayne

    I have a lot of thoughts on this and will respond more in depth when I have time. The major problem with using a trailing 12 month earnings number based on the last 4 quarters is that the new number each month is as dependent on the quarter that you are dropping out of the equation as is the number you are adding. In the present scenario, the -23ish number in the 4th quarter of 08 overwhelms all studies. So PE on trailing mts is 100ish until first quarter of 09, when it magically goes back to 25ish, when the 08 4th quarter drops out. Why not use an exponentially smoothed moving average of last N quarters where you possibly look at throwing out the high and low or some derivation thereof.

    I believe Shiller is the normalization dude , but again why use trailing 12 months data to try to get to monthly numbers, when you could use the actual quarterly numbers to get you an additional degree of accuracy.

    I actually was able to approximate a quarterly database going back to 68. I took the quarterly data going back to 88 from S&P listed on the internet and then backed into each quarter one quarter at a time using the annual numbers from Shilling. This gives me an estimate that I would like to eventually check against the real numbers.

    My next step is to probably try to get in touch with S&P and see if I can obtain the quarterly data somehow.

    One thing I did notice, was that the negative earnings in 4th quarter of 08 was the only negative quarter going back to 1968.

    If anyone cares to peruse, below is what I came up with

    6803 1.53
    6806 1.31
    6809 1.32
    6812 1.60
    6903 1.59
    6906 1.33
    6909 1.37
    6912 1.49
    7003 1.44
    7006 1.22
    7009 1.21
    7012 1.26
    7103 1.53
    7106 1.32
    7109 1.32
    7112 1.53
    7203 1.64
    7206 1.48
    7209 1.49
    7212 1.81
    7303 1.97
    7306 1.96
    7309 1.95
    7312 2.28
    7403 2.17
    7406 2.34
    7409 2.32
    7412 2.06
    7503 1.73
    7506 1.85
    7509 2.12
    7512 2.26
    7603 2.43
    7606 2.44
    7609 2.42
    7612 2.62
    7703 2.60
    7706 2.78
    7709 2.71
    7712 2.80
    7803 2.63
    7806 3.09
    7809 3.05
    7812 3.56
    7903 3.60
    7906 3.77
    7909 3.70
    7912 3.79
    8003 3.94
    8006 3.51
    8009 3.40
    8012 3.97
    8103 3.70
    8106 3.94
    8109 3.66
    8112 4.06
    8203 3.15
    8206 3.30
    8209 3.05
    8212 3.14
    8303 2.93
    8306 3.47
    8309 3.76
    8312 3.87
    8403 4.16
    8406 4.41
    8409 4.12
    8412 3.95
    8503 3.91
    8506 3.63
    8509 3.74
    8512 3.33
    8603 3.82
    8606 3.82
    8609 3.88
    8612 2.96
    8703 4.44
    8706 3.14
    8709 5.32
    8712 4.60
    8803 5.53
    8806 6.22
    8809 6.38
    8812 5.62
    8903 6.74
    8906 6.48
    8909 4.85
    8912 4.80
    9003 5.54
    9006 6.07
    9009 5.33
    9012 4.40
    9103 5.14
    9106 4.54
    9109 3.74
    9112 2.55
    9203 5.36
    9206 5.40
    9209 4.73
    9212 3.60
    9303 6.11
    9306 4.89
    9309 5.81
    9312 5.08
    9403 6.93
    9406 7.38
    9409 7.94
    9412 8.35
    9503 8.88
    9506 9.26
    9509 8.69
    9512 7.13
    9603 8.96
    9606 7.13
    9609 8.96
    9612 10.13
    9703 9.78
    9706 9.86
    9709 10.47
    9712 10.44
    9803 10.29
    9806 9.87
    9809 8.99
    9812 8.56
    9903 10.96
    9906 12.51
    9909 11.93
    9912 12.77
    0003 13.74
    0006 13.48
    0009 13.71
    0012 9.07
    0103 9.18
    0106 4.83
    0109 5.23
    0112 5.45
    0203 9.19
    0206 6.87
    0209 8.53
    0212 3.00
    0303 11.92
    0306 11.10
    0309 12.56
    0312 13.16
    0403 15.18
    0406 15.25
    0409 14.18
    0412 13.94
    0503 16.95
    0506 18.29
    0509 17.39
    0512 17.30
    0603 19.69
    0606 20.11
    0609 21.47
    0612 20.24
    0703 21.33
    0706 21.88
    0709 15.15
    0712 7.82
    0803 15.54
    0806 12.86
    0809 9.73
    0812 -23.25
    0903 7.81

  18. 18 Babak

    wayne, so we had a negative Q in 1968? you mention it but I don’t see it in the data you provide. I’d suggest you get in touch with Prof. Shiller, he’s extremely gracious and has answered my questions in the past.

  19. 19 wayne

    No, I said the negative quarter in the 4th of 2008, was the only negative quarter that I have going back through 1968, which is as far back as I would able to go.

    I have good quarterly numbers going back through 1988 taken from Standard and Poor’s online site, but I had to approximate the quarterly numbers from 1988 to 1968 by backing them out one quarter at a time from the rolling 4 quarter numbers given in Shiller’s data. So, I think they are ok, but can not say with 100% confidence.

    Backing out process was as follows

    From S&P data I had back through 1988
    1988 first quarter = A
    1988 Second quarter = B
    1988 Third quarter = C
    1988 4th quarter = D

    Then from Shillers data I had
    12 months earning for four quarters from 1988 3rd quarter through 1987 3rd quarter was X

    Then the 4th quarter of 1987 would be

    4th quarter earnings = X - (A B C)

    And I simply continued this process, or what I call rolling into each quarter, one quarter at a time.

    So I really am simply looking for quarterly database to validate the one I approximated. Not sure what I would converse with Shiller on since his studies are done on rolling 12 month data. The only thing I could think to ask Shiller is why he doesn’t use quarterly data instead of 12 month data? Thx for the suggestion and I’ll give it some thought

  20. 20 Sam

    0903 7.81

    Thanks Wayne! So with earnings of $7.81 and a current price of 920 (S&P 500), the P/E Ratio for the S&P 500 is 117.797.

    It would take us 117 years and 9 months to receive our original investment back in earnings. The stock market is overvalued by measuring the P/E. Talk about bubbles!

    The banks and insurance companies should invest the $14.8 Trillion given to them by Paulson, Bernanke and Geithner in the United States. Let’s see:

    February 2007 to February 2009: U.S. Recession

    March 2009 to December 2009: Depression

    January 2010 to December 2012: U.S. Hyper Inflation

    January 2013 to January 2032: Great Depression II

    England mentioned two months ago that their recession (Depression) would end in 2032. Sounds about right for the United States as well.

    Also, the NBER has it all wrong on the our current recession beginning in December 2007. The U.S. Recession began in February 2007. Case-Schiller Index proves it.

  21. 21 Dan

    Spot on Sam. That depression hyperinflation is just setting in huh? Man, I don’t know how you guessed it.

    Oh wait… this just in. Inflation lowest on record, economic growth best in half a decade and second best in a full decade. Market rallies 70% and is still fair valued. Earnings up 42% year over year.

    Man, it’s guys like you who created one hell of a buying opportunity for people like me. Thank you for selling me your shares and thank you Obama for telling me the perfect moment to get into stocks.

  22. 22 Antonis

    haha this post is so old. Good work to anyone who really bought shares.

    Buffet style baby!

  23. 23 wayne w

    Sam and Antonis, Is the market cheap after 50% rise?? posted in Oct 2009

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