Market Analysis, January 31, 2024, published with permission from Colin Twiggs.

S&P 500 losing touch with reality

The S&P 500 climbed to a new high of 4928 after breaking resistance at its January '22 high of 4800. Rising Trend Index troughs warn of strong buying pressure. Pricing seems to be losing touch with reality.

S&P 500

The S&P 500 Price-Earnings ratio climbed to 24.2 on December 31st and is forecast to reach 24.9 at the end of the quarter (based on the current index price and forecast Q1 earnings). The chart below shows the pricing history of the index (and its predecessors) over the past 120 years. We use highest trailing earnings to eliminate distortion caused by sharp falls in earnings during past recessions. Prior to the Dotcom bubble, PE had never exceeded 20 times earnings -- even during the heady booms preceding the Black Friday crash in 1929 and Black Monday in 1987. The long-term average PE of 16.5 (since 1973) suggests that the index is currently over-priced by close to 50%.

S&P 500 PE of Highest Trailing Earnings

The price-to-sales ratio of 2.57 shows a similar excess compared to the average of 1.70.

S&P 500 Price-sales Ratio

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