A Decade of Earnings PE and Earnings Yield Comparisons

Here's a decade's worth of Price to Earnings ratio {PE}comparisons and earnings yield comparisons for the S&P 500.  A few things.

1.  I didn't include it on this chart but the comparable numbers for year end 2011 likely were a PE ratio between 12.5 & 13 times 2011 earnings.  The Earnings yield was likely between 7.7% and 8%.  These are estimates as the final S&P earnings will depend on the 4th quarter results which are still being reported.  

2.  Historically since about 1980 studies suggest that stocks have traded between 14 and 16 times their forward looking estimates on a PE basis.  Since year 2000 the average earnings yield on the S&P 500 has been 5.695.  Using these metrics and a midpoint 2012 earnings estimate of $103.00 on the S&P 500 then the historical looking value of the market would be between 1,442 and 1648.  To bring the earnings yield back down to its historical levels the S&P 500 would need to trade this year to around 1750. 

Keep in mind that these are historical observations, likely skewed by the fact that stocks were very overvalued throughout the first half of the last decade.  Probability suggest that a year end 2012 price value north of 1600 is highly unlikely.  In other words don't use this sort of backward looking analysis to project some pie in the sky end of the year number for stocks that likely will not occur.   However, doing this sort of exercise does show you that based on we know today the valuation potential for equities is still very attractive on a multi year basis.   

See here for my source of the S&P data.  I'm assuming this information is accurate but I cannot guarantee the source.   

*Long ETFs related to the S&P 500 in client and personal accounts.