While the stock market is close to a new high, the market’s PE ratio is not
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As the stock market approaches the all-time high for the S&P 500 of 1,565 which was hit on October 10th, 2007, we note that the current valuation of the S&P 500 in early 2013 is substantially cheaper than that high level made in ’07. This could mean further gains for stocks as investors continue to adjust their asset allocation. The current day’s market level of 1,507 represents $108 in all S&P 500’s company’s earnings per share (EPS) resulting in a price to earning’s ratio of just 13.9x. This $108 in EPS for the index currently is a much improved number from the earnings level expected in 2007 which was only $95 per share. This valued the market at 16.5x earnings at the time in 2007, or over 2 multiple points higher than the current valuation now.
While markets are driven by a number of factors including sentiment, GDP growth, employment trends, and global geopolitical factors with no cycle largely exactly comparable to each other, we point out that the current market valuation of stocks is thus actually lower than the recent cycle highs of 2007. In addition, in our article Ample funds on the sidelines to support a good 2013, we outline that there is still a significant amount of cash on the sidelines to be invested for incremental purchases of stocks or bonds which means the current stock market run higher can continue.
Thus with markets not historically expensive with still ample cash un-invested on the sidelines, we would not be surprised to see further gains in stocks. Broad based exchange traded funds that would capture a move higher for equities include StateStreet’s S&P 500 ETF (SPY), the iShares S&P 500 Index (IVV), and the Vanguard Total Stock Market ETF (VTI).