S&P 500 Six-Year Earnings and P/E: The Bubble Is Back

March 25th, 2013

by Bruce Carman

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As indicated by the six-year change of reported earnings and P/E, the S&P 500 has yet again achieved the historical distinction of reaching the bubble valuation that last occurred in the early 2000s.

The six-year average of reported earnings is currently at $63. However, the six-year average real change of reported earnings is again turning negative as occurred at the onset of recessions and bear markets of the past, including in early 2008 and early 2001.

Here is a set of illustrations using the S&P Composite stretching back to the 1870s.

Here is a closer look at the S&P 500 since the early 1980s.

On the basis of the long-term average six-year P/E of 15 and reported earnings of $63, the "fair value" of the S&P 500 is slightly below 1,000.

However, using the six-year average P/E before the unprecedented bubble era since the early 1990s, the S&P 500 "fair value" is in the 800s.

Yet, historically during the end of secular bear markets, the S&P 500 traded at or well below the implied six-year "fair value", including an average six-year P/E of 8-10 at or near the secular bear market lows, suggesting a "fair value" price for the S&P 500 in the 500s-600s.

Thus, the S&P 500 is currently priced for six-year reported earnings growth to historical "fair value" out to 2022-25, implying the average return for investors in the best case for the next 10-12 years will be the average dividend accompanied by a cyclical drawdown risk of 35-40% to 50-60% in the meantime.

© Bruce Carman

The author is a private, independent economic and financial markets researcher, fixed-income and equity investment strategist and consultant, trader, and investor with a background in resource and financial economics, computer and systems sciences, statistical modeling and analysis, demographics, history, and economic, financial, social, and political cycles research.

Footnote on the S&P Composite : For readers unfamiliar with this index, see this article for some background information.

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