S&P 500 Forward P/E Ratio Rises Above 20.0 For First Time in 2 Years

On February 8, the forward 12-month P/E ratio for the S&P 500 was 20.3, which marked the seventh time in the past nine trading days in which the P/E ratio for the index was above 20.0. How does this 20.3 P/E ratio compare to historical averages? What is driving the recent increase in the P/E ratio?

The forward 12-month P/E ratio of 20.3 on February 8 was above the five most recent historical averages for the S&P 500: 5-year (18.9), 10-year (17.7), 15-year (16.1), 20-year (15.6), and 25-year (16.4). In fact, prior to January 29, the last time the forward 12-month P/E ratio had been above 20.0 was February 9, 2022 (20.2). However, it is important to note that even at 20.3, the forward 12-month P/E ratio was still below the peak P/E ratio of the past 25 years for the index of 24.4 recorded on July 16, 1999.

At the sector level, eight sectors had forward 12-month P/E ratios on February 8 that exceeded their 25-year averages, led by the Information Technology (28.6 vs. 21.1), Materials (19.3 vs. 14.7), and Consumer Discretionary (24.8 vs. 19.9) sectors. The only two sectors with forward 12-month P/E ratios on February 8 that were below their 25-year averages were the Energy (11.7 vs. 14.5) and Utilities (14.9 vs. 15.1) sectors. A 25-year average P/E ratio is not available for the Real Estate sector.

What is driving the rise in the forward 12-month P/E ratio? On October 27, the forward 12-month P/E ratio was 17.0, as the price of the index hit its lowest value since May 24 at 4117.37. Since October 27, the price of the S&P 500 has increased by 21.4%, while the forward 12-month EPS estimate has increased by 2.0%. Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio over the past few months.

It is interesting to note that analysts were projecting record-high EPS for the S&P 500 of $243.41 in CY 2024 and $275.34 in CY 2025 on February 8. If not, the forward 12-month P/E ratio would have been higher than 20.3.

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