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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Friday, August 25, 2006

S&P Quarterly P/E History 1926-2000

P/E is a essential way to determine if the stock market is over and under valued. Here we will examine the historical P/E for the S&P 500. You take the total market value of a company and divide it by the trailing one-year earnings to determine P/E ratios.

Historical P/Es for the S&P 500 have varied much over the years, but in late 1990s when the average peaked at about 35 is right when the tech bubble and the downturn of March 2000 began. For a majority of the time from 1926-2000 you saw P/Es between 10-20 which meant investors were willing to pay between $10 and $20 for a dollar of earnings by a company. Late in the 1990s P/Es had doubled and many saw this as a major sign the market was overpriced--and it was. The market turned in March 2000 and then was hit again when the attacks of 9/11 came. That double whammy hurt investors that got in at the top when P/Es were at 35.

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