• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
Dispatches

S&P 500's Price-Earnings Ratio at High End of 60-Year Range

As of the end of August 2023, the S&P 500 index was trading with a price-earnings ratio of 25.7.

by Charles Rotblut | October 2023

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

As of the end of August 2023, the S&P 500 index was trading with a price-earnings (P/E) ratio of 25.7.

Valuations can be looked at both on an absolute and a relative basis. Absolute numbers state an investment’s intrinsic value at a given point in time. The advantage of absolute valuations is that they can be used to draw hard lines between what is priced cheaply, fairly or expensively. A price-earnings ratio above a certain level—say 30—could be considered expensive, for instance. The downside is that judging absolute valuations can be subjective, depending on where the dividing lines between the three tiers are drawn.

Relative valuations compare an asset’s current valuation to a metric or benchmark. An investor can seek price-earnings ratios ranking in the cheapest 20% or 40% of all stocks. Alternatively, an investor may compare current valuations to historical valuations. Figure 1 below does the latter. It shows how the S&P 500’s current month-end price-earnings ratio compares to its month-end price-earnings ratios over the past 60 years (blue line).

Figure 1 S&P 500 Index and Price-Earnings Ratio

The S&P 500’s valuation at the end of August ranked in the highest 6% of all its price-earnings ratios over the last six decades. The only periods when the current valuation was exceeded were 1992, 1999, 2002 and the start of the 2020s.

Above-historical-average valuations have been a trend for the S&P 500 since 2014. During this time, the large-cap index consistently traded with a price-earnings ratio above its historical average of 17.6 Notably, there hasn’t been a specific valuation level where the S&P 500 has fallen to after having reached a high.

This still does not change the fact that the S&P 500’s current price-earnings level is high on a historical basis. Whether it can sustain its current level will depend on investors’ expectations for future earnings and if those expectations are met.

While historical valuations provide a gauge, other measures should be considered. The greater weighting within the index toward “asset-light” companies (e.g., technology companies) with lower depreciation expenses influences valuations, for example. Economic trends, the interest rate environment and investor sentiment are among the many other factors influencing whether valuations are high or low on a historical basis. 

Discussion

RANDALL L from CA posted over 2 years ago:

While it is near axiomatic that high PE ratios reflect investors expectations of future earnings I have to believe that the recent dramatic increase in cheap money (due to both monetary and fiscal policy actions in recent decades relative to historic policies) also pushes asset values to these extremes. That combined with the fact that most of the money in the stock market is really "rich people money" (half the population holds less than 1% of all stocks while the (in)famous "top 1%" owns over half) suggests to me that historic axioms need revisiting as much as our fiscal policies.


JOHN L from NJ posted over 2 years ago:

The stock market discounts future earnings to arrive at a price. When the market begins to forecast earning increases in the next 3 to 30 months, prices begin to rise. Comparing the higher market price (which is forward looking) to current earnings results in a higher P/E ratio than average or "normal". An elevated P/E doesn't provide any insight into the future. If earnings grow fast enough, the market could rise in the future while the P/E declines.


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: