I have been seeing numerous articles this week on how the S&P 500’s PE ratio is at a level not seen since the 90’s. Many investors are taking this as a sign to get bullish on stock again. However, cyclical bear markets tend to bottom when PE ration are much lower than they are now.
From Chart of the Day:
Today’s chart illustrates the price to earnings ratio (PE ratio) from 1900 to present. Generally speaking, when the PE 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).
The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s).
Since the early 2000s, the PE ratio has been trending lower with the very significant but relatively brief exception that was the financial crisis. More recently, the PE ratio has moved slightly higher.
It is worth noting, however, that even with this recent uptick, the PE ratio still remains at a level not often seen since 1990.