Recent gains in equity markets along with weak earnings have caused the S&P 500's P/E ratio to break to new highs. Even though the index is still well below its highs from last October, the S&P 500's trailing 12-month P/E has recently moved to a six-month high of 20.76. During the bull market rally from 2002 to 2007, investors were waiting for the P/E expansion that usually accompanies stock prices moving up faster than earnings. Unfortunately, this time we're getting P/E expansion due to falling earnings.
The rise in the S&P 500's P/E ratio is largely a result of the extremely weak earnings in the Financial sector. As shown below, its P/E is now all the way up to 19.07, which is much higher than normal levels. The P/E ratio for Industrials, on the other hand, has not broken to new highs, even though the sector has recently made a nice move to the upside.