Today is the Monday that begins the last week of 2014. Chances are, most folks who work the market are already checking out, but that does not mean we will not see activity. The last few days could mean profit taking or buying. So far today, it is the latter that seems to be the choice. The market is working hard to go higher, much higher.
Yet and still, the argument remains as to the validity of the current and longer-term state of the market.
- As of today, the S&P 500’s trailing P/E is 18.1. The forward-looking P/E is 16.2. Those numbers sound like big numbers, because they are. They also look like big numbers.
Big numbers indeed, when compared to historical norms, which is what the basis is for making the the P/E argument.
- The market hasn’t allowed the S&P 500’s trailing P/E to move above and then stay above 18.0 in any normal bull market environment (2009 was neither normal nor a bull market – ditto for 1997 to 2007). Assuming 1994-1996 was a normal bull environment and 2004-2008 was as well, we can see stocks just don’t move much higher than where they are now, in terms of valuation.
That might well be true; the market might have plateaued, but that in no way implies or suggests that it cannot maintain its position at these near record heights for a bit. In fact, one could argue that historic norms no longer apply and the S&P 500 will “grow into” into P/E over the coming year.
- The counterarguments are (1) there is no “normal” P/E looking back over the past 25 years, and (2) the S&P 500 could grow into its projected earnings in the coming year.
I agree with the first argument. Going back 25 years in the market, or longer, for comparative purposes, generally is a dangerous game for many comparisons. Some will work just fine, but others will not. Given the advent of the Internet technology, computer/software technology, and the “New Economy,” the market environment is not even remotely close to what it was 25 years ago.
As to P/E specifically, my guess is that the numbers are the numbers, until the market establishes new numbers, and that will only happen if the norms for corporate profit change.
In essence, I agree that the S&P 500 P/E ratio is at the high end, but it is not in dangerous territory, and, thus, the market could grow into its P/E over the coming year. For now, though, it will be interesting to see if the market will continue its march toward 18,000 on the Dow through the year’s end. As always, we will see …
Trade in the day; invest in your life …
