Tuesday, August 5, 2008

SPX P/E ratio tracking from April:

I knew I wrote something about this before and now it's time to look at where we are:


To recap, in April SP500 index was earning at the rate of $63 per share per annum, compared with an "analyst expectation" of $90 at the time. Pretty wild eh?

Today, in AUGUST, SP500 index is earning at the rate of, get this, $50 per share per annum, compared with "analyst expectation" of $87.

In April, the P/E was 21x. Today we are clocking 25-26x easy. However dramatic the selloff you have seen, the fact remains that valuation simply has not kept up at all with reality.

None of these was intentional - no such thing as manipulation in the largest index in the face of the planet, no.

How to use this information?

Whenever the expectation and actual #s are pretty close to each other, that is when you say a bottoming process can occur. It is gonna be southward from here.


Anonymous said...

stupid question:


This site says that the index P/E is 16. How are you going 25 and is there a difference in measurement?

Penn said...

P/E can be calculated using either trailing earning (last 12 months) or forward earnings (estimated earnings for the next 12 months)

As MTG said, trailing PE is 26. I have not read the Marketwatch quote, but I am assuming they calculate PE using forward earnings. Forward earnings are estimates of analysts - which are currently in the 80+ range. Hence you have the low P/E on Marketwatch.

Take the 16 P/E with a grain of salt as the Analysts are not known be very accurate. In the current scenario there margin of error is 40-50% plus on the higher side.

MTGSPY said...

I use the screen WPE in bloomberg, which tells me the current rate of earnings for SPX and the P/E.

For example, NDX is right now at 37 P/E. The _forward_ P/E on both is a different story, roughly 50-60% of the current P/E. That's where analysts #s are used in.