P/E Confused

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    William Rogers

    Hi Paul,

    In your latest post you say “Right now when you look at where the Price/Earnings ratio is of the S&P 500 (the TSP C Fund) calculated with estimated earnings per share for 2017, you get a number just a shade over 18.”

    I use this site to track the PE ratio for the S&P 500 and he Schiller PE ratio. http://www.multpl.com/shiller-pe/

    For the basic S&P 500 ratio – it’s at 26.73 therefore i am unclear as to how you calculate it’s a shade over 18 when considering projected earnings in 2017.

    TS Paul

    I did leave out all the math in my post today in an effort to keep things concise.

    The S&P 500 is at 2381 today (3/16). Projected earnings per share for 2017 is about $130/share.

    2381/130 = 18.31

    There are, as you noted above, a lot of different ways to measure the P/E ratio of the market. The classic way is to use 12 months trailing earnings. That gives a pretty high number, but I think it is pretty well accepted that we will see a much larger than normal increase in earnings in 2017 because they were suppressed so much by the energy sector last year. Low oil prices gutted the earnings of a big slice of the market, but with oil back above $50/barrel those earnings are going to gap up in 2017. So I tend to lean towards projected earnings as being a more realistic gauge.

    Schiller P/E is whole different beast and there are entire books written about when it is a good measure and when it is thrown off. I haven’t looked at it in a while, but my basic recollection is that historically when it was over 20 a crash was sure to follow, although that crash might not come for several years. The problem is that it has been over 20 for virtually all of the past 22 years. The workings of the modern stock market may be different enough now that we can’t rely on on the measure which worked in the past.

    The TSP Allocation Guide www.TSPallocation.com

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