S&P 500 Forward P/E Ratio Hits 19.0 For the First Time Since 2002

On February 19, the S&P 500 closed at a record-high value of 3386.15. Based on this closing price, the forward 12-month P/E ratio for the S&P 500 on that date was 19.0. Given the high values driving the “P” in the P/E ratio, how does this 19.0 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 19.0 on February 19 was above the four most recent historical averages for the S&P 500: five-year (16.7), 10-year (14.9), 15-year (14.6), and 20-year (15.5). In fact, this marked the first time the forward 12- month P/E had been equal to (or above) 19.0 since May 23, 2002 (19.1). However, it is important to note that even at 19.0, 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, nine sectors had forward 12-month P/E ratios on February 19 that exceeded their 20-year averages, led by the Utilities (21.4 vs. 14.5), Consumer Discretionary (23.7 vs. 17.8), and Materials (19.0 vs. 14.0) sectors. The only sector with a forward 12-month P/E ratio below its 20-year average on that date was the Energy sector (16.7 vs. 17.0). A 20-year average P/E ratio is not available for the Real Estate sector.

One year prior (February 20, 2019), the forward 12-month P/E ratio was 16.2. Over the following 12 months (February 20, 2019 to February 19, 2020), the price of the S&P 500 increased by 21.6%, while the forward 12-month EPS estimate increased by 4.1%. Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio over the past 12 months.

It is interesting to note that analysts were projecting record-high EPS for the S&P 500 of $175.97 in CY 2020 and $195.88 in CY 2021 on February 19. If not, the forward 12-month P/E ratio would have been higher than 19.0.