The trailing 12-month P/E ratio recently reached its highest level since February 18th, 2004. As shown in the first chart below, since bottoming at 16.42 on August 15th, 2007, the P/E ratio has risen 43.3% to 23.53. P/Es typically expand when the market rallies and contract when the market declines. In recent years, however, the trend has reversed. From 2004 to 2007, earnings expanded at a faster pace than price, even as the market rallied. Since the market peaked in late 2007, however, earnings have slowed and P/Es have risen sharply.
A chart of P/E ratios going back to 1960 highlights the massive expansion in valuations from 1980 through 2000, which culminated in an extremely high ratio caused by the tech bubble. The historical average since 1960 is 17.87.
Sixty is the new 30 pe or was that an age thing.
Posted by: jay | May 14, 2008 at 02:38 PM