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.