As the S&P 500 index continues to break its record highs intermittently, I worry whether it is time to sell some of my IVVs and wait for another buying opportunity or to reduce downturn risks.
Based on its PE ratio, the S&P 500 may be too expensive. According to multpl.com's data, the current PE ratio of the S&P 500 index is 46.31, where its historical mean is just 15.95%.
But according to the S&P 500 90-year historical data, the index might still be going up for a little longer.
The S&P 500 PE Ratio Analysis with Respect to Bond Yields
As of July 19, 2021, the 30-year Treasury yield is 1.88%. The S&P 500 index closed at 4258.19 and its PE ratio for 2021 is estimated to be 46.31 the same day.
If we take the inverse of the PE ratio of 46.31, we get 2.16% which is fairly close to the 30-year Treasury yield, 1.88%. This means it is worth to buy 30-year Treasury bonds because they guarantee at least of a 1.88% return while the S&P 500 index only has an earnings per 1 index point ratio of 2.16%.
However, if the S&P 500 companies continue to grow their earnings, this high PE ratio should not be a problem.
How Much Will the S&P 500 Index Drop If its PE Ratio Returns to the Historical Mean of 15.95% ?
The S&P 500 index will drop to 1466.60 in order to reach a PE ratio of
15.95% if its earnings stay unchanged.
It's a -65.6% drop.
Formula:
- 4258.19/46.31 = 91.94969 earnings per 1 point of index.
- 91.94969*15.95 = 1466.60
Other Times When the S&P 500 Had Such a High PE Ratio
In 2002, the S&P 500 index PE ratio was 46.17 and in 2009, it was 70.9.
In 2002 and 2009, the 30-year Treasury yields were above the inverses of the S&P 500 index PE ratios, which could mean the current S&P 500 index is not as expensive as it was in 2002 and 2009, because the higher the inverse of the PE ratio, the higher the earning is. In 2021, the estimated PE ratio's inverse is still greater than the 30-year Treasury yield.
| Year | PE Ratio | PE Ratio Inverse | 30-Year Treasury Yield |
| 2021 | 46.31 | 2.16% | About 1.88% |
| 2009 | 70.9 | 1.41% | About 4.5% |
| 2002 | 46.17 | 2.17% | About 5.37% |
Why might the S&P 500 Index Keep Rising?
If we look at the 90-year historical data of the S&P 500 index, we can see a rising pattern, perhaps, toward 2022.
This result is based on technical analysis of the S&P 500 index recovery cycles after 1929,1968 and 2000 financial crises.
After the S&P 500 index made its previous highs after an above mentioned financial crisis. it could keep rising for some more years from a technical analysis point of view.
Conclusion
The S&P 500 is too high, taking into account the inverse of its PE ratio being close to the 30-year Treasury yield. However, it is not as expensive as it was in 2002 and 2009.
The S&P 500 might still keep rising for a little while based on the technical analysis of the recovery cycles after previous major financial crises.
multpl. S&P 500 PE Ratio. www.multpl.com/s-p-500-pe-ratio. Accessed July 22 2021.
macrotrends. www.macrotrends.net. Accessed July 22 2021.
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