"Next, people talk about the S&P hitting new highs as if that was something dangerous. " - Saul
It’s not dangerous for S&P 500 to hit new highs. It’s normal! What is dangerous is when it the P/E hits new all time highs, and folks remain complacent. This is what I see on this thread. 100% of the people here disagree with the premise that S&P 500 is expensive because valuations are at a peak. I even see reasons they give themselves to justify the complacency. The responses here were tremendously helpful. It helps me understand what causes a bubble to grow larger!
Regarding the GAAP argument, how much have the GAAP changes impacted today’s earnings? Does anyone have any idea and have studied the impact? Is it 10%, 15% or 20%? If it is 10%, then you can adjust 25.26 down by 10%. Even around 22.5, P/E is high relative to the past 100 year history.
Regarding a company like AMZN dominating the index, hence skewing the P/E, have you tried excluding AMZN and re-calculating S&P 500 P/E? (I have tried this. It changes the P/E by 0.35. So using the method that multpl.com used, if they currently show 25.25 with AMZN, they would show 24.90 without AMZN)
Why is that?
Just for illustration, if S&P had only two companies (market cap weighted), AAPL with 589B market cap and 46B Net Income (12.5 PE) and AMZN with 358B market cap (188 PE) and 1.9B net income, then the average PE is NOT 100.25 ((12.5 + 188)/2 = 100.25). Average PE is 19.77 in this instance. If anyone followed this example, then they would be able to understand why AMZN in the index makes negligible difference to the index P/E even though AMZN IS the 6th largest company in the index!
BTW, top 5 companies in the S&P500 index currently have $2.3 trillion in market cap and about $118 billion in earnings, giving it a 19.53 PE. IF you include the AMZN (6th) to get the top 6 companies, that shows a market cap of $2.65 trillion, and P/E of 22.2. Total market cap of all companies in the S&P500 is about $20 trillion.
We even have S&P 400 and S&P 600 indices. These are mid-cap and small-cap indices. In terms of market cap, they don’t amount to much (compared to the S&P 500)