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Tip Sheet
Tip Sheet Archive
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Low P/E DJIA
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Stingy Investor Tip Sheet
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| Peak Earnings |
I've been looking at several stocks trading at very low
price-to-peak-earnings ratios. That got me thinking. What does a
price-to-peak-earnings-ratio graph look like for the S&P500?
Thanks to data from Robert Shiller, it's easy to make the graph which
is shown below. The graph uses inflation adjusted data to remove the
impact of, wait for it, inflation which could become a large factor
when earnings remain below peak levels for a long time.
There are two lines shown in the graph. The blue line tracks the
price-to-peak-earnings ratio and the green line shows the median
price-to-peak-earnings ratio of 11.3. You can see that we are now
below median levels on this measure.
(click for larger version)
I was interested to notice a very long period of real earnings
weakness. Real earnings peaked near the start of 1917 and then
declined. A new peak was only achieved in 1955. The long period of
decline tends to reduce the appearance of the 1929 bubble. It also
magnifies the subsequent downturn in the price-to-peak-earnings ratio.
Here's a graphical look at the S&P500's inflation-adjusted earnings
history. The blue line shows earnings and the green line shows peak
earnings.
(click for larger version)
As with other P/E graphs, we are currently below median levels which
indicates that stocks are roughly fairly valued. But we aren't near
historic lows either which indicates that stocks could fall further.
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| | 02/20/2009 11:35 AM EST Permlink save & share | Markets |
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qualified investment adviser before trading. Past performance is a
poor indicator of future performance. The information on this site,
and in its related newsletters, is not intended to be, nor does it
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