Thursday, March 24, 2011
P/E Ratio of the S&P 500
Generally speaking,
when the PE (price/earnings) ratio is high, stocks are considered to be expensive. When
the PE ratio is low, stocks are considered to be inexpensive. From
1900 into the mid-1990s, the PE ratio tended to peak in the low to
mid-20s (red line) and trough somewhere around seven (green line).
Notice how investors were willing to pay much more for one dollar of
earnings during the dot-com boom, the dot-com bust and financial crisis.
Currently, with 94% of US corporations having reported for Q4 2010,
the PE ratio stands at 17 which is a relatively low level when compared
to the past two decades.