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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.
Notes:
- Where's the market headed? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts of Chart of the Day Plus.
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Quote of the Day
"Price is what you pay. Value is what you get." - Warren Buffett
Events of the Day
May 24, 2009 - French Open tennis tournament begins (ends June 7th) - Indianapolis 500
May 25, 2009 - Memorial Day (observed)
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