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Despite all the 1987 Redux talk on Wall Street, the market's P/E dipped to a 10-year low this week.

The S&P 500 is now trading at just under 16 times trailing operating earnings. The P/E ratio hasn't been this low since October 1995.

Here's a chart of the S&P 500 (black line, left scale) with its earnings (blue line, right scale). Whenever the two lines cross, the P/E ratio is at 20.

The market often anticipates the flow of earnings (meaning, the black line moves before the blue). You can see that's what happened in 2000. As a result, the P/E ratio often decreases in the initial stage of a bear market, and increases at the beginning of bull run.

What was unusual about the rally that began in March 2003 is that it came well after the bottom in earnings. I think that indicates how much investor confidence had been rattled by Enron and 9/11, and the coming showdown with Saddam.

Here's the market's P/E ratio:

Posted by edelfenbein at May 26, 2006 10:29 AM