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Historically, the PE for the entire U.S. stock market is about 15. But today’s market PE of roughly 23 is about 50 percent higher than the histo

Historically, the PE for the entire U.S. stock market is about 15. But today’s market PE of roughly 23 is about 50 percent higher than the historic average Every time I see statements about the PE of the market, I wonder which PE they mean? The price of the companies divided by their past revenue? If so, which past? Last month, last quarter, last year? The price of the company divided by future revenue? Then future revenue guessed by whom and for which time frame?

ryansmccoy 6y ago
It's a little complicated because all these metrics are like trying to compare apples, oranges, and bananas. So, it depends, and it's not necessarily the best metric to gauge the valuation of the markets. It's price divided by earnings. For price, I believe it's the sum of the market capitalization of all the companies in the S&P 500. If you divide by shares outstanding for all the companies, then you get price of the S&P 500 (price). For earnings, is the sum of all the companies earnings (Net Income) in the S&P 500. If you divide earnings by shares outstanding, then you get earnings per share (earnings).
rnai 6y ago
Normally this is 12 month trailing PE. "The PE ratio of the S&P 500 divides the index (current market price) by the reported earnings of the trailing twelve months." So it's current total market value (add the market cap of all 500 companies in the index), And divide by the total past 12 months earnings of the same 500 companies. If that doesn't answer your question, please let me know.
ISL 6y ago
In this context, one can probably use either trailing or forward PE. Companies do make forward earnings projections. Neither one is likely to bring P/E even close to 15.
sgerenser 6y ago
This site lists PE based on trailing 12 months earnings as 27.75: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio So PE of 23 is probably based on projected "forward earnings" which isn't really that useful. The most common time period for both is 12 months and the projections are usually coming from a combination of guidance from each company and analysts at banks and investment companies. Obviously there's a large margin of error in these estimates.
deleted 6y ago
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TuringNYC 6y ago
Historically, interest rates were not this low, so naturally PE ratios would inflate now given cheap money. Also, historically, the Fed didn't print money to purchase ETFs and distort/inflate the market. If there is a "new normal" for the PE, the hard part is figuring out what it is. What is the new acceptable level? I have no idea.

ryansmccoy 6y ago

It's a little complicated because all these metrics are like trying to compare apples, oranges, and bananas. So, it depends, and it's not necessarily the best metric to gauge the valuation of the markets. It's price divided by earnings. For price, I believe it's the sum of the market capitalization of all the companies in the S&P 500. If you divide by shares outstanding for all the companies, then you get price of the S&P 500 (price). For earnings, is the sum of all the companies earnings (Net Income) in the S&P 500. If you divide earnings by shares outstanding, then you get earnings per share (earnings).

rnai 6y ago

Normally this is 12 month trailing PE. "The PE ratio of the S&P 500 divides the index (current market price) by the reported earnings of the trailing twelve months." So it's current total market value (add the market cap of all 500 companies in the index), And divide by the total past 12 months earnings of the same 500 companies. If that doesn't answer your question, please let me know.

ISL 6y ago

In this context, one can probably use either trailing or forward PE. Companies do make forward earnings projections. Neither one is likely to bring P/E even close to 15.

sgerenser 6y ago

This site lists PE based on trailing 12 months earnings as 27.75: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio So PE of 23 is probably based on projected "forward earnings" which isn't really that useful. The most common time period for both is 12 months and the projections are usually coming from a combination of guidance from each company and analysts at banks and investment companies. Obviously there's a large margin of error in these estimates.

deleted 6y ago

[deleted]

TuringNYC 6y ago

Historically, interest rates were not this low, so naturally PE ratios would inflate now given cheap money. Also, historically, the Fed didn't print money to purchase ETFs and distort/inflate the market. If there is a "new normal" for the PE, the hard part is figuring out what it is. What is the new acceptable level? I have no idea.