S&P 500 PE Ratio - Is the Past Prologue?

The S&P 500 forward price earnings multiple (PE) is above 30 again, which I think is telling for several reasons:

• We spent a little bit of time at or above this level around the post pandemic market ramp, when earnings were also somewhat depressed

• We were here briefly in early 2021, which preceded an 18% decline in the average throughout 2022

• More notably, PE multiples reached the stratosphere in late 2008, which was the precursor to the “Great Recession”

• On the way down from the tech bubble heights of the early 2000’s, PE multiples were even higher than 30

In 2000, we were entering a recession so there are differences argue for why we can sustain a somewhat higher than average valuation. For example, today we have higher quality, larger companies disproportionately leading the way that are less cyclical and more profitable on balance. Nonetheless, the S&P was dead money for the five and 10 years after that point.

Do we need earnings to surge to a level where they justify the price? Sometimes that's what the market is actually previewing: an acceleration of sorts in earnings that are possibly understated. Perhaps the appetite for stocks is just stronger this time around and the markets are just at a higher resting level during evaluation of this dynamic.

As Shakespeare once pointed out “The Past is Prologue,” — what is history's impact on present-day situations? In politics, economics, or personal decision-makings, asking "will the past be prologue?" can mean wondering if the same cycles or outcomes will repeat themselves, or if there's an opportunity for a new path.