Stock market’s frothy valuations are still far from tech-boom extremes

Posted by MarketWatch

Share on Facebook

Tweet on Twitter


So with the bull market celebrating its five-year anniversary and the S&P 500SPX -0.49% back at record levels, just how pricey are stocks?

It depends how you look at it. Using Thursday’s S&P 500 close at 1,877.03 and a forward 12-month earnings-per-share estimate of $121.86, the forward 12-month price/earnings, or P/E, ratio for the index stood at 15.4, according to data provider FactSet.

That’s above both the five-year average of 13.2 and the 10-year average of 13.2 and the 10-year average of 13.8. The ratio has been above the five-year average for more than a year and has been running above the 10-year average for the past six months. So if you want to call the S&P 500 “overvalued,” you’ve got some ammo, FactSet notes.

But keep in mind that the forward P/E ratio is still well below the 15-year average of 16.0. Fifteen years takes you back to the most bubbleicious part of the tech boom. During the first two-years of the time frame — 1999 to 2001 — the forward 12-month P/E ratio stood consistently above 20 and peaked near 25, FactSet recalls. So with the ratio below the 15-year average and nowhere near its peak, one could also argue that the index might still be undervalued, FactSet says.

The ratio would be even higher if analysts weren’t projecting record earnings levels over the next four quarters, they said, in a note:

At this time, the Q4 2013 quarter has the record for the highest bottom-up EPS at $28.78. However, starting in Q2 2014, industry analysts are projecting EPS for each of the next four quarters to exceed this record amount. In aggregate, they are calling for 11.3% growth in EPS over the next four quarters (Q214 – Q115), compared to the previous four quarters
(Q213 – Q114).

Probably the most important thing to keep in mind, however, is that, as the chart shows, P/E can remain at extremes for quite some time, making efforts to time the market based solely on the measure a potentially dubious proposition.

–William Watts

Follow William on Twitter @wlwatts

Follow The Tell @thetellblog