The P/E Multiple for SPY Does Not Compute

October 15, 2013, 14:16 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Stock Traders Daily has recently conducted an extensive review of the current valuation of the S&P 500 and its conclusions differ substantially from the valuations otherwise observed by reviewing the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).  The conclusion suggests that the average P/E multiple in the S&P 500 ETF is substantially higher than the P/E multiple afforded to SPY, and the stocks that comprise the market are much more expensive than the ETF appears to be as a result.

Further investigation reveals that the largest 100 companies by market cap also have a combined average P/E multiple that significantly exceeds that of the S&P 500 ETF at this time.  The P/E multiples offered by the Trust Advisory for SPY is a lowly 15x, which is even less than the current P/E multiple offered by Standard and Poor’s (17.91), and substantially lower than the average we have observed for both the S&P 500 and the largest 100 stocks respectively.

Specifically, the combined average of all S&P 500 companies provides a current P/E multiple of 24.59, and the largest 100 have a 23.64 P/E multiple on average.  What is more surprising is that these numbers are not taking into account negative earnings, because negative P/E multiples do not exist.    If these were included the average P/E multiple for the companies that comprise the S&P 500 would be even higher than they are now.

With that said, the average forward P/E that we have calculated suggests a 16x multiple based on next year’s expectations, which assumes a very aggressive earnings growth rate in the next 12 months.  Our macroeconomic analysis, The Investment Rate, suggests that growth is stalling and it foretells much slower growth going forward, this has already been demonstrated by Dow companies and the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) , but analysts continue to have aggressive expectations.

Reasonably, analysts tend to start high and ratchet their numbers down, and this current earnings season is no exception.  EPS expectations have come down by 10% since May, and they continue to be on a downward path.  This presents serious concerns for investors in search of value. 

Not only is the Market rich based on current measures, but future growth estimates are being reduced and unless earnings growth rates increase considerably Wall Street will likely begin to observe the distortions we have indentified here as being integral to ongoing decisions to chase.

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