Chart Of The Day-PE's On Current Earnings

From Chart Of The Day.

This chart goes along with what they posted last week so I thought we should have a look at it as well. My one thought is that before much valuation work is done on this, we need to remember that not only are earnings impacted by the recession but they are also impacted by all of the reserves and charge offs corporations are currently taking. That should start to improve in 2010 and I believe the market will start to reflect that improving environment next year. However, if that isn't the case then stocks are expensive!

"Last week's chart illustrated the current plunge of S&P 500 earnings. Today's chart illustrates how this 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."

Link: https://www.chartoftheday.com/ {Subscription Required}.

*Long ETFs related to the S&P 500.