S&P P/E Flirts With 20/1

The Lehmann Letter (SM)

The stock market was down at the opening this morning, but remains near record highs.

See E. S. Browning’s article in this morning’s Wall Street Journal for an excellent discussion of the outlook:

“Expect More Volatility With Stocks Priced Near Perfection”


Mr. Browning discusses valuations and begins as follows:

“One reason stocks were so troubled last week is that they are getting closer to what Wall Street, in its inimitable slang, calls being “priced for perfection.”

“Priced for perfection, unfortunately, doesn’t mean attractive. It means that stock prices are so high that gains depend on a very favorable investing environment, with strong corporate profits, low interest rates, low inflation and continued global growth.

“If the environment starts looking less favorable, stocks can weaken, as they did last week.

“Stocks probably aren’t completely priced for perfection yet, money managers say, but they are moving that way. The S&P 500 stock index closed Friday at 19.4 times its companies’ net profits for the past 12 months, well above its long-term average of 15.5, according to Birinyi Associates…..”

See the remainder of the article as well as the chart and table below for historical perspective.

Price / Earnings Ratio

1.3 S&P EPS PE  09-29-14

(Recessions shaded)

Price / Earnings ratio (12-month trailing actual earnings) for S&P 500.


Q I               17.89

Q II              17.66

Q III             17.82

Q IV             18.45


Q I               19.66

The ascent becomes more difficult as the P/E climbs to 20/1.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2014 Michael B. Lehmann



  • Zalikha Barikzi

    Zalikha Barikzi (zbarikzi@dons.usfca.edu)

    If I was
    advising an investing client I would say that the stock market is doing very
    well, which is a very positive sign. For example, GoPro and AliBaba are good
    stocks for the long term inventors. I would ask this individual which type of
    stocks they are most interested in investing their time and money. These stocks
    will gain about twenty to twenty-five percent in next twelve to fifteen months
    based on their revenue. GoPro is a stock that sells cameras which are coming
    with upgraded models which are boosting stock to about $72 a week ago. Keep in
    mind the difference of two months ago being $36 for GoPro stock. Today, the market
    closed on October 3rd and it closed at $86 per share. This stock has
    a good potential of making profit. The individual must be told which stock is
    which and where it stands and where to NOT invest their money. Some stocks this
    individual should NOT invest their money is Penny Stocks, which are the most
    dangerous because the companies are not stable. Another is SkyLine Medical Inc,
    which is not good because they are not gaining anything, don’t have a good
    revenue/profit, and history.

    This client whom
    I am advising must know the difference between attractive stocks and those
    running towards perfectionism. Stocks have gain its credit in the last two
    years, which is great. This client must do some additional research on history
    of stocks in addition to knowing the “unknowns”. We must do our research and
    even with enough resources and research stocks can come down meaning it is
    unpredictable. We do not know which stock will go up or down. For example,
    AliBaba IPO is a stock as mentioned above. It opened for public on the market
    for $92.70 and after just ten minutes it went to $99.70. Just immediately after
    about fifteen minutes the stock went down to $92.36. Today, AliBaba stock is
    $88.18 which tells us how the cap of the company is 220 billion dollar value,
    which is more than Amazon, and EBay. Amazon, and Ebay stocks are more than $300
    per share. On the other hand, AliBaba has $220 billion cap on market and their
    stock is $88. This tells the client which I am advising that it is hard to
    predict. AliBaba was the hype on the market and everybody was talking about it
    and right now it is not moving up. Currently, it is a long-term wait for this stock
    based on the next revenue showing how much their profit it. If the profit is
    good based on the Co-Founder of AliBaba Jack Ma told on his report that it had
    6.8 billion dollar profit last year. We will see on this upcoming quarter
    whether or not his argument is true. If so, the company will gain revenue and
    the stock should go up another 20%. This client needs a lot of careful decision
    making to do while gaining some additional knowledge and courage to move
    forward in such an unpredictable market.

    Zalikha Barikzi (zbarikzi@dons.usfca.edu)

    • http://blog.beyourowneconimist.com/ Mike Lehman

      Thanks, Z….