Market Price to Earnings Ratio

From Chart of the Day.com:

And here's their comments:

"Today's chart illustrates the price to earnings ratio (PE ratio) from 1900 to present. 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 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-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), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). Since the early 2000s, the PE ratio has been trending lower with the very significant but relatively brief exception that was the financial crisis. More recently, due to rising stock prices and declining corporate earnings, the PE ratio has trended higher and has just made a new post-financial crisis high and is now at a level that prior to the 1990s would have been considered very high."

I have one comment.  Based on what seems to be a PE above 20 in the chart above, it looks to me like the author is using trailing earnings versus forward estimates.  The advocates for looking at  historical earnings  is that you are dealing with a known certainty in that these earnings have already been posted.  On the other hand most market observers, including me, prefer forward estimates because markets are constantly looking towards the future.  Markets discount forward events.  In that sense it is a daily voting machine regarding what might occur at some future date.  The current forward PE for the S&P 500 is between 16.50 and 17.50 times earnings out to June of next year depending on who's estimates you use.  That is still high by historical standards but not as bad as the piece above would suggest.  

Link:  Chart of the Day.com: Historical PEs.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at anytime without notice.

Back later in the week.