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Below we highlight the p/e ratio of the S&P 500 at the end of bull markets going back to 1942. The lines in the scatter chart represent the change in the p/e from the start of the bull market to the end of the bull market. Red dots indicate p/e expansion and green dots indicate p/e contraction. The current bull market is different than any other on record because there has actually been a large contraction in p/e ratios. At the start of this bull in October 2002, the p/e of the S&P stood at 29.06. It is currently at 17.84. There have only been two other bulls that saw contractions, but they were very small. This data bodes well for those arguing that this bull still has legs.
Curious if PEs not expanding in part due to large buyback activity.
Posted by: Dividend Growth | October 04, 2007 at 09:52 AM
This chart shows that the current bull market is based on earnings growth. An interesting chart might be annualized earnings growth vs length of bull market. I think you should find that we are also in unprecedented territory, but maybe not as bullish.
As an aside, have you done any analysis on China P/Es vs US P/Es. I would be very interested to see comparisons when relating to the 2000-2002 area in term of accelerating P/Es. With Greenspan's recent comments about China looking like a possible bubble I think the analysis would be highly interesting.
-BTW I love the analysis. Combining this with an overall economic view has led to some great trades.
Posted by: Earnings Growth | October 04, 2007 at 11:48 AM
Buybacks are an issue as is hidden inflation.
To my thinking this argues not for more gains to come, but rather supports the view that the bull run has been a mirage.
Posted by: curiousGeorge | October 04, 2007 at 12:27 PM
The thing is, the P/E contraction leaves the multiple still toward the high end of "end of bull market cycles" on average.
That argues for the bull not having legs.
Posted by: Trent | October 05, 2007 at 07:11 PM
Could this effect simply be the nature of the sectors that have led this bull run?
Where technology and financials have led bull markets of the past, commodity related sectors such as energy and materials have been the leaders so far this time.
It seems the stocks in these groups often show P/E contraction as they appreciate in price. Due to the historically cyclical nature of commodity pricing, earnings often grow faster than stock prices. A contracting P/E may signify we are approaching peak earnings.
I would be interested if anyone with a longer investing history can relate the Bespoke information above to what has happened in cases where commodity related stocks have led bull markets in the past.
Posted by: Cavemanus | October 06, 2007 at 01:59 PM
Cavemanus,
Interesting comment. We'll look into this and report back with any compelling findings.
Justin at Bespoke
Posted by: Justin | October 06, 2007 at 07:54 PM
Please find a copy of the book "How to lie with statistics". I believe you'll find your answer there.
BT
Posted by: barclay tanner | October 07, 2007 at 03:29 PM
Mathematically all this means is that earnings estimates were too low when the bull market started or too high now (or a combination of the 2).
1) If they were too low then - who cares? Probably low earnings estimates were based on the then recent carnage of the tech bubble crash. Earning probably ended up much better than expected.
2) If they are too high now - this would seem to indicate that stocks are currently over priced (or the recession ain't coming).
With regard to #2, somebody is wrong (i.e. either the bulls or the bears). To assume we have to go back above a 30 PE to end the Bull market is ridiculous though (which is what this post seems to imply).
Posted by: NoFate | October 07, 2007 at 05:55 PM
The analysis should include the period after the 1929 crash. The rally from about 1933-37 exhibited a similar pattern of falling P/Es during a cyclical bull rally. See http://www.comstockfunds.com/files/NLPP00000%5C026.pdf.
After a great mania, people are inclined to pay less for a dollar of earnings, not more.
NoFate is right to challenge the implication that P/Es ought to go back to about 30, where they obviously never should have been in the first place.
Posted by: TKL | October 08, 2007 at 01:00 AM