Here is a great chart sent to me this morning by Chartoftheday.com:
Notice how historically the P/E ratio in the S&P500 would to peak in the low to mid-20s. This went on for almost 100 years until market participants were willing to pay much higher multiples for these silly dot-coms. But this was nothing compared with the peak in P/E during the financial crisis. Stocks got slaughtered as the market priced in future earnings declines. Talk about unprecedented levels.
We are now back at normal P/Es where some might even say that the market is cheap. But can it get cheaper? Of course. The problem here is the “E” in P/E. We don’t know what the earnings are going to look like. All we have are estimates – and they’re always getting revised. If we have a recession, and some could argue that we’re already in one, then you could see the typical 30% haircut in S&P earnings. Where would that put P/E ratios when you ask yourself what multiple you would put on those “earnings”?
Just a little food for thought going into the weekend.