The S&P 500 and Our Crystal Ball
The S&P 500 is the most commonly used benchmark in measuring the performance of stocks. Because of the size of its constituents and the liquidity of its market, it is also used as a leading indicator of US equities in general. Thus, a lot of people look to the S&P 500 to get a feel of where stocks will trade in the future.
We charted the S&P 500’s P/E ratio, or its price-to-earnings ratio, since the 1900s to get a feel of the kind of cycles the index has been through, and to see if there is a clear indication of where it is headed.
As depicted in the graph, there are times where the S&P’s P/E traded above its average and times where it traded below, however, it has always moved back to its mean.
The current ratio is 21.27 versus its historical average of 15.77, indicating that the S&P 500 is overvalued and prices will drop. The recent downtick only contributes to this warning.
We have released a lot of charts on why the inevitable bear is coming in US equities, this is just another to confirm our thesis.