S&P 500 Forward P/E Ratio Falls Below Five-Year Average for First Time Since Q2 2020

On February 23, the closing price for the S&P 500 was 4225.50 and the forward 12-month EPS estimate for the index was $228.85. Based on this closing price and EPS estimate, the forward 12-month P/E ratio for the S&P 500 on that date was 18.5. How does this 18.5 P/E ratio compare to historical averages? How much has it changed in recent weeks?

Forward P/E Ratio Below the Five-Year Average, But Above Other Historical Averages

The forward 12-month P/E ratio of 18.5 on February 23 was below the five-year average of 18.6. However, it was still above the next four most recent historical averages: 10-year (16.7), 15-year (15.5), 20-year (15.5), and 25-year (16.5).

In fact, this marked the first time the forward 12-month P/E ratio was below the five-year average of 18.6 since April 15, 2020 (18.4). However, the forward 12-month P/E ratio of 18.5 on this date was still well above the lowest P/E ratio of the past nine years of 13.1 recorded on March 23, 2020.

At the sector level, five sectors had forward 12-month P/E ratios on February 23 that were below their five-year averages, led by the Materials (15.1 vs. 17.7) sector. On the other hand, six sectors had forward 12-month P/E ratios that were above their five-year averages on that date, led by the Energy (12.2 vs. 7.1) sector.

S&P 500 Price Declines Pull Down the Forward P/E Ratio

On January 3, 2022, the S&P 500 closed at a record-high value of 4796.56. The forward 12-month P/E ratio on that date was 21.4. From January 3 through February 23, the price of the S&P 500 decreased by 11.9%, while the forward 12-month EPS estimate increased by 2.3%. Thus, the decrease in the “P” has been the main driver of the decrease in the P/E ratio since January 3.

It is important to note that analysts were still projecting record-high EPS for the S&P 500 of $225.51 for CY 2022 and $248.10 for CY 2023 on February 23. If not, the forward 12-month P/E ratio would have been higher than 18.5.

In addition, it should be noted that with the increase in price of the S&P 500 on February 24, the forward 12-month P/E ratio is now 18.8 and back above the five-year average.

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