Sunday, October 21, 2007

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
$3.3711.87
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.

1 comment:

Werner Merthens said...

This is a very nice review of the S&P 500 valuation history in terms of PE ratio.

It is quite refreshing to find a site presenting basic facts and seeks to educate. Today disaster and doomsday fantasies seem to dominate the mainstream media and its share of the blogosphere.

Looking at historical PE ratio the question should be asked: What impact do PE ratios have on future price appreciation?

I published my thoughts about that topic here:
http://musingsofaspeculator.blogspot.com/2007/06/about-price-earnings-ratios.html
http://musingsofaspeculator.blogspot.com/2007/06/about-pe-ratios.html