I don’t think the market is overvalued at all. It’s just skewed by outliers. Take Amazon for instance that has a PE of 300. S&P has got a P/E of 24. What would be S&P’s PE without Amazon? 18! And that’s just one outlier that itself is IMHO not overvalued. I think Saul’s coiled spring is a very good description of the market.
Thanks Stan, that’s brilliant.
Saul
What would be S&P’s PE without Amazon? 18!
Just wondering, if you take out the high market cap outlier, shouldn’t you also remove an equal amount of the low PE market cap outliers as well for this exercise?
JT
And why is it some of the talking heads say the S&P PE is 17. I’ve heard it more than just once recently.
What would be S&P’s PE without Amazon? 18! Here’s the numbers:
(98x + 2300)/100 = 24
x = 18
Great question and answer!
Here is another one: How much earnings growth is expected in the S&P 500 if energy were excluded?
2015 S&P 500 EPS: 117.19
2015 Energy EPS: 17.96
2015 S&P-Energy EPS: 99.23
2016 Est S&P 500 EPS: 117.34
2016 Est Energy EPS: 5.24
2016 Est S&P-Energy EPS: 112.10
S&P 500 2016 YoY Growth: (117.34/117.19)-1 = 0%
S&P 500 Less Energy 2016 YoY Growth: (112.10/99.23)-1 = 13%
Here is the source:
http://www.sectorspdr.com/sectorspdr/Pdf/All%20Funds%20Docum…
If you take a look at the S&P MidCap 400 and the S&P SmallCap 600 data at the bottom, earnings growth is even better. It will be interesting to see what happens when the market figures this out.
DJ
Excellent, DJ. My first thought when reading Stan’s post was – I bet lack of Energy earnings had an even greater effect on the PE. Looks like that’s likely.
I’d also be interested to know what Energy was in 2014. It clearly had already dropped off in 2015 Q4 – wondering if 2014 was around $20 EPS or closer to 25.
Great stuff from you both.
Hi Denny:
We have been in a secular bear market since 2000. We have witnessed decreasing PEs during this period even though they expanded some after 2009 but looking since 2000 the PEs are still far down from the 2000 peak. Not saying they will go back there but there has been a definite change in regime.
Even assuming earnings will continue to growth, the PE will tend to be low and the market will go sideways until brighter secular outlook takes hold. We are far from euphoria but I think the interest in stocks is definitely not at a high.
Stocks are businesses that are productive but we have to remember they are like anything else in the sense that how much one is willing to pay can vary a great deal depending on the time period.
I definitely think the rise of the absolute amount of money into the stock market has something to do with the expansion of the monetary supply over the last several decades. Inflation has been controlled but stock appreciation still has something to do with the fact that there is more money in the system. I am not a financier or an economist but I would like one to explain this to me in terms that everyone could understand.
tj
Just wondering, if you take out the high market cap outlier, shouldn’t you also remove an equal amount of the low PE market cap outliers as well for this exercise?
You could, but what would be the point? It wouldn’t even change much because those would have to have a negative PE of -274 to counter the effect of Amazon. In any case my point is that even though the market (or S&P 500) is supposedly overvalued, you’ll have a tough time finding any overvalued stock in it and the only reason the 500 seems overvalued is because of a couple of outliers that aren’t really overvalued themselves.
It will be interesting to see what happens when the market figures this out.
DJ,
Good thinking there - energy seems to be the other half of the puzzle.
Stan
Just wondering, if you take out the high market cap outlier, shouldn’t you also remove an equal amount of the low PE market cap outliers as well for this exercise?
Also you have to consider the weighting. Amazingly, the top 10 stocks – 2% of the stocks in the S&P – account for a whopping 17% of the index’s weighting!
Here’s where I found weightings: http://slickcharts.com/sp500
And check out the PE’s on these babies:
Apple Inc. 11.01
Microsoft Corporation 40.25
Exxon Mobil Corporation 28.77
Johnson & Johnson 20.58
General Electric Company 44.99
[Amazon.com](http://Amazon.com) Inc. 297.29
Facebook Inc. Class A 72.90
Berkshire Hathaway Inc. Class B 14.26
JPMorgan Chase & Co. 11.15
AT&T Inc. 17.20
For an avg of 55.84 or weighted avg of 51.00. That sounds like a ton, but we can certainly see some reasons. XOM’s, MSFT’s, and GE’s are all historically high for outlierish reasons. Then there’s FB and AMZN! Does anyone actually think this is a list of 10 grossly overvalued companies?
I definitely think the rise of the absolute amount of money into the stock market has something to do with the expansion of the monetary supply over the last several decades. Inflation has been controlled but stock appreciation still has something to do with the fact that there is more money in the system. I am not a financier or an economist but I would like one to explain this to me in terms that everyone could understand.
tj
I’m neither financier nor economist.
Monetarists (Milton Friedman) think that inflation is a monetary phenomenon anywhere and everywhere. Increase the money supply and prices go up. It didn’t happen everywhere but only in the stock market. So maybe it was not the money supply.
Asset classes compete for your money. If bond yields go down because the Fed is holding down interest rates then stocks become more interesting as investors search for better yield pushing up the market. This sounds more reasonable to me.
Denny Schlesinger
I realize that last paragraph is a bit disconnected from my main idea about market PE. I was trying to tie together the idea that the market PE is low but some people are still saying that it is overvalued based on the CAPE for example.
Do you agree that we are in a secular bear? The PE was so high in 2000 and the bigger the bubble the slower we would return to a secular bull. The PE has come down from 2000 but came back up since the financial crisis. Would you think the market PE would return to more historical average or is there a new ‘normal’? if the earnings are growing then we might experience a sideways market.
tj
some people are still saying that it is overvalued based on the CAPE for example.
I don’t put any faith in CAPE. Although I have not followed the discussion in detail there was talk about some change or other that made the comparison of the current vs. the historic CAPE meaningless.
More to the point, I don’t invest in the market but in individual stocks. Of course I am aware of what Mr. Market is doing but it has a vanishingly small influence on my trades. Someone investing in index funds would have a totally different take on the issue.
Do you agree that we are in a secular bear?
We were but I think once the chart broke out over the double top things are changing.
http://invest.kleinnet.com/bmw1/stats40/^GSPC.html
Would you think the market PE would return to more historical average or is there a new ‘normal’?
“New normal?” I think Bill Gross was trying to sell something but he got himself fired. 
P/E seems to be mean reverting but the mean could change with the composition of the market unless yield is the more important factor controlling P/E. I really don’t know.
Denny Schlesinger
I’m neither financier nor economist.
Monetarists (Milton Friedman) think that inflation is a monetary phenomenon anywhere and everywhere. Increase the money supply and prices go up. It didn’t happen everywhere but only in the stock market. So maybe it was not the money supply.
Asset classes compete for your money. If bond yields go down because the Fed is holding down interest rates then stocks become more interesting as investors search for better yield pushing up the market. This sounds more reasonable to me.
Stocks as well as foreign housing markets. Friedman’s model also assumed velocity of money is a constant I believe. But since the financial crisis, the velocity of money has dropped
http://www.marquetteassociates.com/Research/Chart-of-the-Wee…
http://www.americanthinker.com/articles/2016/01/the_velocity…
While normally you would expect massive inflation, if the banks, corporations and people hoard it then the turn over is going to drop.
Do you agree that we are in a secular bear?
We were but I think once the chart broke out over the double top things are changing.
well we are talking about the PE not only the P, right? In that sense the PE nor the CAPE have peaked through.
about the ‘new normal’… if the PEs have been ‘high’ for the last 16 years then the average can increase or go to a new level, no?
do you think the market is overvalued now? if so how did you determine that? or you are not talking in those terms. Or are you putting the focus on the technicals?
certainly we all look at individual stocks and we want to believe we can spot the good ones but I think this discussion does show that some do like to take the market as a guide. The term average often does not mean much especially when we talk about the returns of individual stocks.
We are not dealing w a Gaussian.
tj
velocity of money is now low and people (and mainly banks and corporations) are hoarding cash.
there has been a general effect whereby investors in search of higher returns went into the stock market because of the low interest rates. This effect may attenuate as interests rate goes back up but it appears that that will happen very slowly.
On the other hand there will be demand for what people wants and will want, and the businesses producing or supplying those will succeed in pulling out the money from that hoard. Even if the velocity of money remain slow in general, those businesses will profit enormously and become one of the winner take all. After a while of that the velocity of money may re-accelerate.
what do you think?
tj
Not that we need more evidence, but here’s another example of compressed PE. In the chart below you can see the share price hasn’t moved for over 2 years, yet revenue has increased by 114%, and earnings have increased by 193%. The PE now is below 12, a year ago it was over 19, two years ago I estimate it was over 32.
ESNT - Essent Group Ltd.
Indicator 3/31/16 12/31/15 9/30/15 6/30/15 3/31/15 12/31/14 9/30/14 6/30/14 3/31/14
Revenue 102.47 97.48 91.74 84.07 80.01 72.74 64.62 54.28 47.82
Diluted EPS 0.52 0.48 0.44 0.41 0.38 0.328 0.295 0.231 0.177
Price/Share 23.91 21.89 24.85 27.35 23.91 25.73 20.77 20.29 23.2
PE 12.92 12.80 15.95 19.36 19.38 N/A N/A N/A N/A
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Invest wisely my friends
CMFSoloFool
Ticker Guide: AFSI, NTGR and OTEX
Wow, I like the look of ESNT, I think I’ll look into that one further.
Has anyone already done any work on it, more than what SoloFool posted?
Yes, ESNT looks very, very interesting. Just look at the margins on this business. PMI must be a VERY profitable niche!
Since it starting operating at a profit in 2013, here are the margins:
**2013 2014 2015**
**Operating margin:** 44% 57% 65%
**Net profit margin:** 50% 40%* 44%
Veeeery interesting. And it is a small cap fast-grower with a 1YPEG way under 1.
Tiptree, Fool One guide, intrigued.