Why Such Little P.E Expansion With This Market Rally ?

Perhaps the headline question was phrased incorrectly: maybe a better way to ask the question to investors is, “Is there enough P.E expansion with this SP 500 rally ?”

Using the forward 4-quarter estimate published each week by Thomson Reuters, here is the SP 500 P.E ratio at month and quarter end:

7/31/15: 16.8(x)

6/26/15: 17.2(x)

5/29/15: 17.2(x)

4/24/15: 17.2(x)

3/27/15:17.1(x)

2/27/15:17.5(x)

1/30/15:16.3(x)

12/26/14: 17.0(x)

9/26/14: 15.7(x)

6/27/14: 15.9(x)

3/28/14: 15.6()

12/27/13: 15.7(x)

9/27/13: 14.6(x)

6/28/13: 14.2(x)

3/29/13: 14.0(x)

12/28/12:12.8(x)

9/28/12:13.3(x)

6/29/12: 12.7(x)

3/30/12: 13.3(x)

12/30/11: 12.1(x)

Source: internal spreadsheet, with the cited P.E’s matching up with this blog each week.

Analysis / conclusion: Does a near 50% expansion in the market’s multiple in the last 3.5 years, mean that we are close to a top in the bull market ? Working from memory in 1987, the SP 500 peaked near 26(x) forward earnings after the Dow 30 was a somewhat ridiculous 25% year-to-date as of July 31, 1987. In March of 2000, the SP 500 P.E was thought to be well north of 30(x), and the Nasdaq’s multiple, well, fughetaboutit…

Personally, I think the SP 500’s multiple is “walking up” the gradual improvement in Financial and Technology earnings, which remain the two largest sectors within the SP 500 41% and 37% of earnings weight and market cap respectively.

In Q1 ’15, the SP 500 earnings growth was 11%, ex-Energy, against a 17(x) multiple at the end of June. While I expect Q2 ’15 to be lower than 11%, if we see 7%, 8%, 9% y/y earnings growth for the SP 500, which is still relatively subdued growth, a 17(x) multiple is still very reasonable.

An SP 500 growing core earnings 7%,8%, 9% each quarter, or high single digits, with a market multiple fluctuating around mid-teens, that market multiple doesn’t seem risky to me.

Apple is trading back down to the low end of its 6 – 7 month trading range. Given the stock’s importance to this bull market, a break of $119.75 or the 11/29/14 peak, and the stock could drop to $100.

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