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Is the S&P 500 overvalued?

May 17, 2013

SP500_Forward_PE (May 17 13).pngThe forward 12-month P/E ratio for the S&P 500 now stands at 14.4, based on yesterday’s closing price (1650.47) and forward 12-month EPS estimate ($114.94). This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than three years (April 2010). Given the high values driving the P in the P/E ratio, how does this 14.4 P/E ratio compare to historical averages? Is the index now overvalued? On the one hand, the index is now trading above both the 5-year (12.9) and 10-year average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.5), and is not close to the peak P/E ratio of 25 recorded in the late 1990’s and early 2000’s.

Of the 463 S&P 500 companies that have reported earnings to date for the quarter, 70% have reported earnings above estimates. This percentage is in-line with the average of 70% recorded over the past four quarters. However, only 47% of companies have reported sales above estimates. This percentage is below the average of 52% recorded over the past four quarters. If 47% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.

The blended earnings growth rate for Q1 2013 is 3.2% this week, unchanged from last week’s growth rate of 3.2%. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date, led by the Financials and Telecom Services sectors.

The index is reporting earnings growth for Q1 (3.2%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. Nine of the ten sectors are reporting an earnings increase for the quarter, led by the Financials, Utilities, and Telecom Services sectors. On the other hand, the Information Technology sector is the only sector reporting an earnings decline for the quarter. The blended revenue growth rate for the index for Q1 is -0.3%, down from an estimate of 0.4% at the end of the quarter. However, only two sectors are reporting an earnings decrease for the quarter: Energy and Materials.

Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 75 companies have issued negative EPS guidance for Q2 2013, while 19 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth rate for Q2 2013 has dropped to 1.4% today from an expectation of 4.4% on March 31.

The peak weeks of the Q1 2013 earnings season are now finished. During the upcoming week, the last two Dow 30 components (Home Depot and Hewlett-Packard) and 25 S&P 500 companies are scheduled to report earnings for Q1 2013 during the week.

Read more about the earnings trends of the S&P 500 in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.  

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