Price Earnings hits 120 – the highest Level….EVER

Posted by Robert Prechter - Elliott Wave & Chartoftheday

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Quote of the Day
“Price is what you pay. Value is what you get.” – Warren Buffett

“Every bear market bottom of the past 100 years sported a P/E ratio of 6 or 7, which is a long way below the current level of 120 the highest disparity ever. Cash still seems to be the best investment position. The past ten years were a “sell and hold” market, and all we have to do is continue to hold (cash)”.

Last week’s chart illustrated the current plunge of S&P 500 earnings. Today’s chart illustrates how the plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). 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 1936 into the late 1980s, the PE ratio tended to peak in the low 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) and the dot-com bust (early 2000s). As a result of the current plunge in earnings and the recent 2.5 month stock market rally, the PE ratio has spiked to the low 120s – a record high.


Last weeks chart and commentary:


While the stock market is up sharply since early March, the economy as well as corporate earnings continue to suffer. Today’s chart helps provide some perspective as to the magnitude of the current economic decline. Today’s chart illustrates that 12-month, as-reported S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1 2009), making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.

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