We prefer our blog posts short and sweet given the info overload inflicted on today’s average investor, so we’ll try to keep this post concise and to the point.
What does a decade of p/e compression look like for the average (or even institutional) investor ?
Here is what we’ve seen the last 12 years:
Date S&P 500 value forward est. p/e ratio
—— —————— —————- ————
3/2000 1,550 $55 28(x) height of tech bubble, peak for S&P 500
10/2002 800 $53 19(x) bottom of tech bubble
3/2003 788 $54 15(x) start of Gulf War, end of Nasdaq bear market
10/2007 1,570 $103 15(x) double-top for S&P 500, early stages of financial crisis
3/2009 667 $60 11(x) bottom of financial crisis in March, 2009
5/2012 1,300 $109 12(x) today’s market p/e – note the all-time record earnings for the S&P 500
Anyone see a pattern here ? Important tops and bottoms were selected for obvious reasons, but the reader should likely see that no matter how earnings act, the market p/e continues to compress over the last 12 years. In fact, despite 20% – 30% growth off the 2009 bottom, the S&P 500 hasnt traded much over 15(x) earnings since then. Even during the 2003 – 2007 rally, the S&P 500 multiple stayed roughly even with earnings growth at about 15(x) earnings.
First, hopefully the above columns and data are easily readable in the post. ( I hope the process of posting doesnt goof up ( a technical term) the columns. Second, p/e expansion is the hallmark of a bull market and makes all the long-only advisors look like a genius, while p/e compression is the hallmark of bear markets and we are living through one, and you can see the power it wields on what are pretty good earnings.
Someday this p/e compression will stop and the stock market will start to afford equities some “earnings expansion” on the growth of the S&P 500.
However we are not there yet. It is discouraging.
Maybe due to the volatility in earnings, the S&P 500’s p/e has compressed. Is it macro v. micro ? Is it Greece and China and greater government regulation ?
Inquiring minds want to know.
No individual stocks mentioned