Is the Market Overvalued? A look at the S&P P/E Ratio
The S&P maintains a nice spreadsheet of the index and earnings over the past 20 years or so. See here:
I decided to perform a simple exercise. I looked at the 'As reported Earnings P/E ratios' and calculated the average up til 6/30/08 or before the crisis hit. Performing a little statistical analysis: The average works out to about 23. Standard deviation about 7. Lows were around 12 and highs around 46. If the S&P maintains the current level of about 1030 through the end of the year the P/E ratio for the year ending 2009 works out to 26. Based on these numbers S&P is slightly over-valued.
Looking forward the current earnings estimates are declining with only $9.83 in earning for the quarter ending 9/30/2009 and $8.49 for the quarter ending 12/31/2009. Based on the previous quarter revisions these estimates should go up. I'm sure these estimates will get revised upwards by 20-30%. Current estimated earnings for the year is $39.35. Revising 3rd and 4th quarter earnings up 20% gives us earnings of about $43 for the year. Crunching the numbers the P/E ratio works out to 24 for the year. Now he market is looking fairly valued.
With estimates substantially higher for 2010 - Goldman Sachs was estimating S&P earnings of $52 for 2009 and $75 for 2010 the market can easily support a much higher P/E by years end. Assuming one standard deviation this works out to (23+7) a P/E of 30. This could work out to a S&P of 1290 by years end.