The S&P 500 has soared 14.5% since the start of the year.
Are equity valuations stretched?
On May 17,
"The forward 12-month P/E ratio for the S&P 500 now
stands at 14.4, based on yesterday's closing price (1650.47) and
forward 12-month EPS estimate ($114.94). This is the highest
forward 12-month P/E ratio logged by the S&P 500 in more than
three years (April 2010). Given the high values driving the P in
the P/E ratio, how does this 14.4 P/E ratio compare to historical
averages? Is the index now overvalued? On the one hand, the index
is now trading above both the 5-year (12.9) and 10-year average
P/E ratios. On the other hand, it is still trading below the
15-year average P/E ratio (16.5), and is not close to the peak
P/E ratio of 25 recorded in the late 1990's and early
Another measure of valuations (arguably stricter and more
robust) is the PE10, also known as the Shiller P/E.
Currently, the S&P 500's PE10 is at 24.8, (see chart) which
puts it above its historical median of 15.89, but still below its
1999 peak of 44.20.
The PE10 is calculated by accounting for yearly earnings of
the S&P 500 for each of the past ten years and adjusting them
for inflation using the Consumer Price Index (
On a year-to-date basis, the S&P's top performing industry
sectors are healthcare (NYSEARCA:XLV) ahead by 19.89%, and the two
consumer sectors; staples (NYSEARCA:XLP) up by 15.95% and
discretionary (NYSEARCA:XLY) up by 18.48%.
Since bottoming in March 2009, the S&P 500 is up more than
While the broader stock market may ignore valuations, the first
sign of any significant mean reversion will be reflected in a
technical break below key price levels. Remember: Valuations
are important, but prices are a leading
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