Unlike Any Other (So Far) - A Look at P/E Ratios During Bull Markets
Thursday, October 4, 2007 at 05:22AM Today we are providing a look at one of our recent B.I.G. Tips reports available to Bespoke Premium subscribers. These reports are released daily and provide unique perspectives on current market themes as well as ETF and stock recommendations.
Below we highlight the p/e ratio of the S&P 500 at the end of bull markets going back to 1942. The lines in the scatter chart represent the change in the p/e from the start of the bull market to the end of the bull market. Red dots indicate p/e expansion and green dots indicate p/e contraction. The current bull market is different than any other on record because there has actually been a large contraction in p/e ratios. At the start of this bull in October 2002, the p/e of the S&P stood at 29.06. It is currently at 17.84. There have only been two other bulls that saw contractions, but they were very small. This data bodes well for those arguing that this bull still has legs.
Reader Comments (9)
As an aside, have you done any analysis on China P/Es vs US P/Es. I would be very interested to see comparisons when relating to the 2000-2002 area in term of accelerating P/Es. With Greenspan's recent comments about China looking like a possible bubble I think the analysis would be highly interesting.
-BTW I love the analysis. Combining this with an overall economic view has led to some great trades.
That argues for the bull not having legs.
Where technology and financials have led bull markets of the past, commodity related sectors such as energy and materials have been the leaders so far this time.
It seems the stocks in these groups often show P/E contraction as they appreciate in price. Due to the historically cyclical nature of commodity pricing, earnings often grow faster than stock prices. A contracting P/E may signify we are approaching peak earnings.
I would be interested if anyone with a longer investing history can relate the Bespoke information above to what has happened in cases where commodity related stocks have led bull markets in the past.
Interesting comment. We'll look into this and report back with any compelling findings.
Justin at Bespoke
BT
1) If they were too low then - who cares? Probably low earnings estimates were based on the then recent carnage of the tech bubble crash. Earning probably ended up much better than expected.
2) If they are too high now - this would seem to indicate that stocks are currently over priced (or the recession ain't coming).
With regard to #2, somebody is wrong (i.e. either the bulls or the bears). To assume we have to go back above a 30 PE to end the Bull market is ridiculous though (which is what this post seems to imply).
After a great mania, people are inclined to pay less for a dollar of earnings, not more.
NoFate is right to challenge the implication that P/Es ought to go back to about 30, where they obviously never should have been in the first place.