25 May 2009

Chart of the Day

Together with collapsing EPS (down 90% over the past 20 months), the S&P 500 PER has zoomed up to levels last seen in Japan in the 1980's.

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.

Either the perspective on corporates earnings has to dramatically and quickly improve, or the stock market has to adjust quite sharply; exhuberance cannot last for ever.