S&P 500 outstrips earnings

By Colin Twiggs
August 8, 2020

First, please read the Disclaimer.

The S&P 500 is way over-priced based on all three earnings multiples.

75% of companies in the S&P 500 have already reported earnings, so we have a good idea as to what overall earnings will be for the second quarter.

Based on the latest index price of 3349.16, trailing PE comes in at a whopping 33.6 times. But this is distorted by the current sharp fall in earnings and may not reflect future earnings potential.

S&P 500 Earnings

Forward PE at 25.7, based on S&P earnings forecasts for the next four quarters (ending June 2021), is more reasonable but some quarters are still distorted by the current recession.

PEmax, on the other hand, uses highest trailing earnings (the highest preceding four quarters are circled above). This removes distortions caused by short-term earnings fluctuations and better reflects long-term earnings potential.

S&P 500 PE of Highest Trailing Earnings

At 24.01 PEmax is close to December 2017 (24.16), the second highest peak in the last 120 years. Exceeded only by the Dotcom bubble. The current reading is almost 30% higher than Black Friday (18.86) in October 1929 and Black Monday (18.69) in October 1987.

While PEmax may climb even higher in the next few months, the level is a clear warning to investors to stay overweight in cash and underweight stocks.

"Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same."

~ Ronald Reagan

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Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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