Back in 2008 and 2009 Birinyi Associates and several other firms and publications took a significant amount of flack for the way that the S&P 500's P/E ratio was reported. One person even made the claim that we were "lying" about the P/E ratio of the index. At Birinyi we typically calculate a P/E ratio using fully diluted earnings from continuing operations. Using this methodology the P/E ratio for the S&P 500 on 3/9/09 was 9.99. Around the same time, Standard and Poors was reporting on their website that the P/E using as reported earnings was closer to 120.
The problem with these earnings figures were the significant losses reported in the fourth quarter of 2008 along with weak earnings in the preceding and following quarters. Together these three quarters drove the rolling annual S&P 500 EPS to an unrealistically low level. Using as reported earnings, the S&P P/E ratio was 5x higher than the long-term average when the index was presenting the best buying opportunity in the last ten years. Currently that same figure is closer to 15.9. So using that methodology the S&P 500 - on a valuation basis - is significantly cheaper now, despite the fact that it has risen 80%.
The "as reported earnings" clearly failed, which is why most sophisticated equity investors use earnings from continuing operations. Below we highlight the S&P 500 index and its P/E ratio. Currently at 15 stocks are slightly more pricey than they were in August, but the relative value indicates that as stocks have rallied so have earnings.
The long-term (20yr) average P/E ratio for the S&P 500 is 23.13. Even for much of the 80s and 90s the P/E fluctuated between 15 and 20. To put this into perspective, based on trailing 12mo EPS of $79.72 a P/E of 23.13 places the S&P 500 at 1,844.39! That's 54% above current levels!