Not only are stock prices near all-time highs, they’re also getting more expensive.
And by expensive, we mean price-earnings ratios are getting high.
This is because stocks are rising faster than earnings are expected to grow.
Currently, the price-to-forecasted earnings ratio of the S&P 500 is 15.2, notes FactSet’s John Butters.
“This P/E ratio is based on Wednesday’s closing price (1862.31) and forward 12-month EPS estimate ($122.62),” said Butters.
“The P/E ratio of 15.2 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 13.2, and above the prior 10-year average forward 12-month P/E ratio of 13.8,” he continued. “It is also slightly above the forward 12-month P/E ratio of 15.1 recorded one month ago. During the past month, the price of the index increased by 1.2%, while the forward 12-month EPS estimate increased by 0.2%.”
As you can see in the chart, the ratio is at a level last seen before the financial crisis.
But before you decide to short the stock market, keep in mind that these valuations could certainly go higher. Furthermore, stocks don’t have to fall for valuations to revert to their means; earnings could just catch up.