Historical Earnings and P/E Ratios for the S&P 500 Index

The S&P 500 index is one of the most famous and widely followed U.S. stock market indices. It was created in 1957, although data for stocks representative of the index have been determined by backdating the index into the 19th century, as I previously discussed in an earlier post about historical dividends for the S&P 500 index.

The chart below illustrates the end-of-year closing values for the S&P 500 index, the earnings of the index, and the trailing P/E ratio for the index. The earnings shown below are "as-reported" earnings that take into account all of the various write-offs or other non-recurring expenses, as opposed to "operating earnings," which omit non-recurring expenses. There are supposedly non-recurring expenses for most of the companies in the index almost every year, so it makes sense to account for them.

Year	Index Closing Value (EOY)	Index Earnings	Trailing P/E Ratio
1957	39.99	$3.37	11.87
1958	55.21	$2.89	19.10
1959	59.89	$3.39	17.67
1960	58.11	$3.27	17.77
1961	71.55	$3.19	22.43
1962	63.10	$3.67	17.19
1963	75.02	$4.02	18.66
1964	84.75	$4.55	18.63
1965	92.43	$5.19	17.81
1966	80.33	$5.55	14.47
1967	96.47	$5.33	18.10
1968	103.86	$5.76	18.03
1969	92.06	$5.78	15.93
1970	92.15	$5.13	17.96
1971	102.09	$5.70	17.91
1972	118.05	$6.42	18.39
1973	97.55	$8.16	11.95
1974	68.56	$8.89	7.71
1975	90.19	$7.96	11.33
1976	107.46	$9.91	10.84
1977	95.10	$10.89	8.73
1978	96.11	$12.33	7.79
1979	107.94	$14.86	7.26
1980	135.76	$14.82	9.16
1981	122.55	$15.36	7.98
1982	140.64	$12.64	11.13
1983	164.93	$14.03	11.76
1984	167.24	$16.64	10.05
1985	211.28	$14.61	14.46
1986	242.17	$14.48	16.72
1987	247.08	$17.50	14.12
1988	277.72	$23.76	11.69
1989	353.40	$22.87	15.45
1990	330.22	$21.34	15.47
1991	417.09	$15.97	26.12
1992	435.71	$19.09	22.82
1993	466.45	$21.88	21.32
1994	459.27	$30.60	15.01
1995	615.93	$33.96	18.14
1996	740.74	$38.73	19.13
1997	970.43	$39.72	24.43
1998	1229.23	$37.71	32.60
1999	1469.25	$48.17	30.50
2000	1320.28	$50.00	26.41
2001	1148.08	$24.69	46.50
2002	879.82	$27.59	31.89
2003	1111.92	$48.74	22.81
2004	1211.92	$58.55	20.70
2005	1248.29	$69.93	17.85
2006	1418.30	$81.51	17.40

From 1957 through 2006, the average end-of-year trailing P/E ratio for the index was 17.58. However, as shown in the chart above, the trailing P/E ratio of the S&P 500 index fluctuated widely during the past 50 years.

During the 1960s, the average end-of-year trailing P/E ratio for the S&P 500 index was about 17.90. During the 1970s, the average end-of-year trailing P/E ratio plummeted to 11.99 during the inflationary economic conditions prevalent during that decade. The average end-of-year trailing P/E ratio rose slightly to 12.25 during the 1980s, and soared to 22.55 during the stock market boom of the 1990s. From 2000-2006, the average end-of-year trailing P/E ratio rose to an unsustainable 26.22 as economic conditions in the U.S. deteriorated and the stock market bubble burst. The data from 2000-2006 is skewed due to the substantial pullback in corporate earnings during 2001 and 2002.

The chart below (click on the image for a larger view) illustrates the annual trailing P/E ratio for the S&P 500 versus the average end-of-year trailing P/E ratio of 17.58 between 1957 and 2006. As shown, the trailing P/E ratio at the end of 2006 was below the average end-of-year P/E ratio of the index over the past 50 years. Accordingly, although valuations have clearly changed over time and are influenced by external events such as deteriorating or improving economic conditions, an argument can certainly be made that the S&P 500 had a reasonable valuation at the end of 2006 based on the S&P 500 data over the past 50 years.

September 2007 Returns For My Model Long-Term Portfolio

My Hypothetical Model Portfolio registered its strongest performance (on a % basis) in nearly a year during September. The Portfolio was down for the month until the Federal Reserve unexpectedly cut interest rates by 50 basis points on September 18th, sparking a strong stock market rally. The FED said the rate cut was intended to "help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets."

As of the market close on September 28, 2007, the Hypothetical Model Portfolio was up $6173, or about 4.06% during September. The Hypothetical Model Portfolio is now up about $12929 in 2007, a gain of 8.89%, as shown on the table below (click for a larger image of the table). The 2007 returns for the Hypothetical Model Portfolio still slightly trail the 9.10% return of the benchmark Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index.

International stocks led the way in September, with the iShares Emerging Markets ETF (EEM) rising about 11.57%, the Templeton Russia closed-end fund (TRF) rising sbout 9.61%, and the Vanguard Developed Markets Index mutual fund (VDMIX) rising about 5.39%. The FED's rate cut weakens the U.S. currency relative to foreign currencies and was a major cause of the strong returns for foreign stocks during September.

Tech stocks were also strong performers during September - the Nasdaq 100 ETF (QQQQ) rose a strong 5.20%. Large caps also performed well, with VFINX rising 3.72%.

Financials were laggards - the iShares Dow Jones U.S. Select Dividend Index Fund (DVY) rose a scant 0.30% and the Vanguard Small Cap Value Index (VISVX), a fund holding many financial stocks, rising just 1.69%.

Through the first 9 months of 2007, foreign and tech stocks have been carrying the Hypothetical Model Portfolio. EEM has led the way, with a return of about 30.9%, QQQQ has returned about 19.26%, and VDMIX has appreciated about 13.58%.

One of the holdings in my Hypothetical Model Portfolio, VFINX, paid dividends during September. As I mentioned in a previous post, the dividends from mutual fund holdings are reinvested. VFINX paid a dividend of $0.62/share (a total of $153.38) which was reinvested on September 21 to purchase an additional 1.091 shares at a price of $140.49/share.

I was glad to see decent returns during September. I anticipate that the portfolio will rise a few more percentage points over the last three months of the year and will close out 2007 up 10-15% for the year.

*The Hypothetical Model Portfolio was created with an investment of $100,000 in securities as of the closing values on December 30, 2005 and an additional $25,000 was invested n securities as of the closing values on December 29, 2006. The reason why the total cost in the chart is greater than $125,000 is because the total cost accounts for the value of distributions reinvested into the mutual funds in the portfolio.

August 2007 Returns