What Exactly Is The S&P 500’s (Actual) P/E Ratio, Anyway?

What Exactly Is The S&P 500’s (Actual) P/E Ratio, Anyway?

Quick – what’s the current P/E ratio of the S&P 500?

Standing in line today at lunch, waiting for my chicken pita, I was checking Wall Street’s closing numbers on my Android, reading about how stocks haven’t been this cheap since the early 90’s – and thought whhhhhat?

The S&P price to earnings multiple is nearing depths not seen since the early 1990’s.

In fact stocks in the S&P now trade at just 11.7 times analyst estimates of operating earnings for the coming year. The P/E multiple is roughly back where it stood at the end of March 2009 just as the market was starting an 80 percent surge.

A lot of investors are kicking themselves for having missed that run-up. The question now: Should they jump in now to not to miss another? Are stocks cheap?

11.7 times forward earnings…really?  If correct – that doesn’t sound that bad.  It’s not exactly “secular bear market bottom” cheap – but it’s a reasonable P/E.

Not so fast, my friend, writes John Mauldin in his weekly newsletter.  The “E” in that ratio is for Operating Earnings – also knows as earnings before “the bad stuff”:

You hear a lot of BS on various media about forward P/E ratios being only 11.5; so if that is the case then stocks are cheap, even by my standards. But those stock touts and shills use operating earnings, something that was really never done until the 1990s, and that is a way for companies and people who want you to buy stocks or mutual funds to maintain that valuations are better than you think. Operating earnings estimates are over 39% higher than estimated as-reported earnings.

Reported earnings are real, in our pockets, what we put on our tax returns. Operating earnings are of the EBIH variety, that is Earnings Before Interest and Hype, or Earnings Before Interest and Bad Stuff (the BS of earnings). Those are the expenses they ignore because they pinky swear those mistakes will never happen again. Anybody using operating earnings on TV should have a flashing warning underneath their picture that says “stock promoter” or “cheerleader” or worse. I lose patience with such pandering.

Thanks for clearing that up, John!

More on this topic: Our target stock market valuation at this bear market bottom.