Wednesday, February 13, 2013

Does This Bull Market Still Have Legs?

We have had a bull market for going on almost four years now, since the Standard & Poor's 500 bottomed out back on March 2009. It's getting to the point that some financial pundits are starting to wonder if the market is overheated, if it's time to pull back on stocks. But according to one key measure, this bull run may still have some legs. 

Consider that the price-to-earnings ratio - the ratio of a share price to that company's underlying earnings per share - of the S&P 500 is now at about 14.4. The long-term average for that figure is 15. If stocks were selling at exorbitant prices, we'd expect that number to be higher than the average.

That's exactly what happened during the dot-com era.  During the bull market that lasted from the 1980s to 2000, the S&P 500's P/E ratio rose from 7.7 to a staggering 28.6. Now that's a sign of an overheated market.

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