Highest Forward 12-Month P/E Ratio for S&P 500 Since 2002

On January 17, the value of the S&P 500 closed at a record-high value of 3329.62. Based on this closing price, the forward 12-month P/E ratio for the S&P 500 on that date was 18.7. Given the high values driving the “P” in the P/E ratio, how does this 18.7 P/E ratio compare to historical averages? What is driving the increase in the P/E ratio?

The forward 12-month P/E ratio of 18.7 on January 17 was above the four most recent historical averages for the S&P 500: 5-year (16.7), 10-year (14.9), 15-year (14.5), and 20-year (15.5). In fact, this marked the first time the forward 12-month P/E had been equal to (or above) 18.7 since May 28, 2002 (also 18.7). However, it is important to note that even at 18.7, the forward 12-month P/E ratio was still well below the peak P/E ratio (of the past 20 years) of 24.4 recorded on March 24, 2000.

At the sector level, 10 sectors had forward 12-month P/E ratios on January 17 that exceeded their 20-year averages, led by the Utilities (20.5 vs. 14.4), Consumer Discretionary (22.6 vs. 17.8), and Materials (18.4 vs. 14.0) sectors. A 20-year average P/E ratio is not available for the Real Estate sector.

One year prior (January 18, 2019), the forward 12-month P/E ratio was 15.5. Over the following 12 months (January 18, 2019 to January 17, 2020), the price of the S&P 500 increased by 24.7%, while the forward 12-month EPS estimate increased by 3.8%. Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio over the past 12 months.

The current forward 12-month P/E ratio is 18.6 (based on the closing price and forward 12-month EPS estimate on January 23). The index also had a forward 12-month P/E ratio of 18.6 on January 16, January 21, and January 22. However, prior to January 16, the last time the forward 12-month P/E ratio was equal to 18.6 was May 31, 2002.

It is interesting to note that analysts are projecting record-high EPS of $177.41 for the S&P 500 for CY 2020. If not, the forward 12-month P/E ratio would be even higher than the current 18.6.