Is the stock market over-heated? The shorthand answer on Wall Street deals with the Price-Earnings (PE) Ratio or how many times the stock market values each dollar of earnings per share. In other words, if a stock earns $1.00 per share and sells for $20 per share, then the PE ratio for that stock is 20 times. If the earnings per share for the whole stock market is $100 per share and the S&P 500 index is 2,000, then the PE ratio is also 20 times. Since the long term average over the last sixty years is 16.5 times, we would call 20 times over-heated.
The trick is figuring out what are earnings per share (EPS) for the entire market. Currently estimated at about $112 per share, that makes the current PE ratio about 18 times, which would be only slightly over-heated. However, investing legend at Wharton, Dr. Jeremy Siegel, has dug into the numbers and thinks the $112 estimate is too low. One reason is the dramatic fall in energy prices has triggered huge balance sheet write-downs that are ending as oil prices stabilize. That adds about $8 per share. In addition, the strong U.S. dollar has depressed earnings about $5 per share, which also seems to have stabilized. Adding that $13 to the current estimate of $112 means real EPS is about $125, which drops the PE ratio to 16 times or about average.
So, is the stock market over-heated? No, not by the normal measure of PE ratio.
Now, go back to sleep . . . with one eye open!
The trick is figuring out what are earnings per share (EPS) for the entire market. Currently estimated at about $112 per share, that makes the current PE ratio about 18 times, which would be only slightly over-heated. However, investing legend at Wharton, Dr. Jeremy Siegel, has dug into the numbers and thinks the $112 estimate is too low. One reason is the dramatic fall in energy prices has triggered huge balance sheet write-downs that are ending as oil prices stabilize. That adds about $8 per share. In addition, the strong U.S. dollar has depressed earnings about $5 per share, which also seems to have stabilized. Adding that $13 to the current estimate of $112 means real EPS is about $125, which drops the PE ratio to 16 times or about average.
So, is the stock market over-heated? No, not by the normal measure of PE ratio.
Now, go back to sleep . . . with one eye open!
