Explore Our
“Off The Wall” Blog

Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.

Why the Market is Still a Good Deal

U.S. News and World Report Smarter Investor

The market may be near its highs, but its historic price-to-earnings ratio still make the S&P 500 look affordable.

J.P. Morgan Asset Management publishes some great research at the end of every quarter called the “Guide to the Markets.” It is chock-full of good data, but one highlight in the most recent stood out, prompted by a single question, “Is the S&P 500 over-bought?”

According to J.P. Morgan, the answer is no. Let me tell you why.

On Dec. 31st, 1996 the Standard and Poor’s 500 index was trading at 741. At that time, the S&P 500 had a 12-month forward price-to-earnings ratio of 16. This is a fancy way of saying that the index (price) was 16 times higher than the earnings that a consensus of analysts expected would be reported over the coming 12 months.

By March of 2000, the S&P 500 was trading at 1,527 and had a forward P/E of 25.6. When a P/E increases, it is because either the index (price) went up, the earnings went down, or a combination of both. In this case, the index’s rise from 741 to 1,527 caused the P/E to increase from 16 to 25.6.

Essentially, as the P/E is rising, it is telling investors they are paying more and more for one dollar of earnings.

Let’s fast forward to October 9th, 2002. The S&P 500 had careened down 49 percent to 777 and had a forward P/E of 14.1 as the tech bubble burst and a recession ensued. From there, it was a slow, steady march up back up to an index level of 1,565 by October 9th, 2007, a 101 percent gain.

At that point, the forward P/E was at 15.2 percent and we all know what happened from there.

By March 9th of 2009, the S&P 500 had lost 57 percent to bottom out at 677 and had a forward P/E of 10.3. Ouch.

However, fast forward to today, and by the end of the first quarter, things were much different! The S&P 500 had recovered to 1,569 with a forward P/E of 13.8, which is a 130 percent run.

So, it’s probably natural to assume that since the market has had a nice run, it’s time for it to take a “breather.” That is certainly a popular thought these days. In fact, nary has a day gone by where I haven’t heard that message repeated over and over on TV or in print.

But look again at the current forward P/E (at 13.8). It’s is still lower than where it was during the market low in 2002 (14.1). In fact, it’s also lower than October of 2007 (15.2), which was the last time the S&P 500 was above 1500. My opinion is that the S&P 500 is not overbought. In fact, if the forward earnings stay the same as on March 31st, 2013, the S&P 500 would have to reach a level of 1,700 before the forward P/E reached 15.2—a level last seen in October of 2007. Meaning, there is still room to grow.

David B. Armstrong, CFA, is a Managing Director and Co-founder of Monument Wealth Management, a Registered Investment Advisor located just outside Washington, DC in Alexandria, Va. David is routinely featured in national media sources and has been a speaker at several major industry conferences including Barron’s Winner’s Circle, IMCA, InsideETFs, LPL Financial Business Leaders Forums and Focus conferences. Follow David on his blog which can be found on his website, on Twitter @MonumentWealth, and on the Monument Wealth Management Facebook page.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance referenced is historical and is not guarantee of future results. All indices are unmanaged and may not be invested into directly.

Read this article on U.S. News & World Report…


Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

A copy of the Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.

Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Stay up to date!

Subscribe to our “Off the Wall” Blog for articles and videos on all things wealth management, by all members of our Team. Unlike Facebook, we will never share your data with anyone.