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Is the Market Overvalued? A look at the S&P P/E Ratio



October 01, 2009 – Comments (6)

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.


6 Comments – Post Your Own

#1) On October 01, 2009 at 8:13 PM, goldminingXpert (28.85) wrote:

Revising 3rd and 4th quarter earnings up 20% gives us earnings of about $43 for the year. And why would we do this when revenues are cratering? How do you get earnings surprises when the top-line #s are consistently missing expectations? 

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#2) On October 01, 2009 at 10:59 PM, GenericInvestor (73.34) wrote:

I'm sick of reading the bulls and bears on this site. If I stopped reading comments from these people I would have done a lot better.


Talk is cheap. Anyone touting tops and bottoms are a dime a dozen. It's like GMX's "The S&P is about to collapse..." series as it zoomed hire.

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#3) On October 02, 2009 at 3:21 AM, goldminingXpert (28.85) wrote:

zoomed hire, eh? A generic, if gramatically FAIL, comment, from a genericinvestor.

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#4) On October 02, 2009 at 1:40 PM, rexlove (99.70) wrote:

Generic - you're free to make your own decisions. I would never take word for word advice of anyone on these message boards - no matter how high their rating. Personally I like to read both bullish and bearish arguments and try to form my own opinion on where the market is heading and where to invest.

I advise you to do the same.

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#5) On October 02, 2009 at 1:53 PM, rexlove (99.70) wrote:

GMX. Earnings for the 2nd quarter came in at $13.51 after all the revisions. I could be wrong but I can't imagine it would drop to $9.83 and $8.49 for the 3rd and 4th quarters respectively. The S&P website reports the estimate revisions are coming in slow but remain to the upside.

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#6) On November 11, 2009 at 10:22 PM, rexlove (99.70) wrote:

Actual earnings came in much higher than estimates for the third quarter. According to the S&P website we are currently at $14.91 with 87% reporting. That's more than 50% over the estimates. Current market P/E based on full year 2009 earnings is looking to be about 25. Still slightly overvalued but with earning estimates rising the way they have been - we can easily support a higher than average PE. 4th quarter earnings estimates are still at a riduclously low of  $8.56. If anything like the 3rd quarter this could put revised estimates at around $13 to $14 for the 4th quarter. Again the market is starting to look fairly valued at a PE of around 23. I stand by my previous conclusion - the S&P could easily hit 1290 by years end.  

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