The bull market continues and the S&P 500 went up in April, May, June and July. So, «Sell in May and go away» would be a disaster for any investor on this planet this year. Just like it was in the 50`s under president Eisenhower. This is not a normal situation in the midterm election.
As you can see from the chart below, similar situation happened in 1954 and 1958. Apple Inc is a big contributor to the bullish market right now, and it just hit a $1 trillion market cap. A milestone we have never seen before for a U.S publicly traded company.
Not only Apple Inc are hitting milestones. Many of the stock exchanges around the world are also hitting now all-time highs. But how expensive are the U.S stocks? The P/E ratio of the S&P 500 has fluctuated from a low of around 6x in 1949 to over 120x in 2009.
The long-term average P/E for the S&P 500 is around 15x, meaning that the stocks that make up the index collectively command a premium 15 times greater than their weighted average earnings.
The trailing P/E ration will change as the price of a company`s stock moves, since earnings are only released each quarter while stocks trade day in and day out. Current S&P 500 PE ratio are down -0,13 percent on Thursday 2 August 2018 (based on trailing twelve month) to 24,34.
Some investors prefer forward P/E which is similar to the trailing P/E, but uses estimates of projected future earnings, typically forecast over the next twelve months. If the forward P/E ratio is lower than the trailing P/E ratio, it means analysts are expecting earnings to increase. If it is higher, analysts expect a decrease in earnings.
These measures are often used when trying to gauge the overall value of a stock index, such as the S&P 500 since these longer term measures can compensate for changes in the business cycle.
A business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles are generally measured using rise and fall in real inflation-adjusted GDP, which includes output from the household and nonprofit sector and the government sector, as well as business output.
Output cycle is therefore a better description of what is measured. The business or output cycle should not be confused with market cycles, measured using broad stock market indices; or the debt cycle, referring to the rise and fall in household and government debt.
To put it into perspective. Apple`s P/E is 18,04. Facebook; 24,56. Netflix; 144,43. Amazon; 165,60. Yelp; 625,17. Groupon; 230,15. Godaddy; 227,27. Under Armour; 136,36. Alibaba; 48,25. S&P 500 is 24,34, so how expensive are they all?
It looks like Amazon are expensive, but that company is up 84,75 percent YoY, while Apple with its 18,14 is up only 35,26 percent. Facebook has lost a lot of money in a few days, and the stock is up only 5,45 percent YoY. Estimated P/E for Tesla in 2019 is – 177,68. The stock went up over 16 percent on Thursday.
Investors need to be aware that the P/E ratio can be misleading a lot of times, especially when the underlying business is cyclical and unpredictable. Cyclical businesses have higher profit margins at the peaks of the business cycles. Their earnings are high and P/E ratios are artificially low. It is usually a bad idea to buy a cyclical business when the P/E is low. A better ratio to identify the time to buy a cyclical businesses is the P/S ratio.