What is Market’s PE ratio?

January 24, 2009 at 2:31 am Leave a comment

It would seem that PE ratio for the overall market should be readily available, as it is one of the basic stock valuation tools.  Yet, amazingly enough, prominent financial site show strikingly different results.

For example, according to Yahoo!, S&P 500 PE ratio stands just over 10.  However, official Standard and Poors site quotes 19.5!  I then tried to look up Dow Jones Industrial average ratios.  Here, Yahoo! and Dow Jones sites are in agreement, showing 10 — that same ratio for S&P reported by Yahoo! for S&P 500, with the side note that companies with losses were excluded from calculation.  It makes quite a difference, especially now — huge write-offs by financials skew overall ratio higher.  If losses are included in calculation, Dow Jones site reports PE of 13.

I don’t want to take sides on who is right here.  I know exact PE ratios of stocks in my portfolio, and that is far more important than that of the overall market.  A valuation of any index depends on the stocks that comprise the index, not the other way around.  This simple truth often tends to be forgotten.

Entry filed under: Market Conditions.

Tech Company Earnings Dow 4,000

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Leon Shirman's long-term investment philosophy is summarized in his book, “42 Rules for Sensible Investing”, also available from Amazon.

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