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There’s a chart I worked on yesterday that, at first, I wanted to weave into a larger post about how the stock market today looks nothing like the stock market in 2000.
But I’m ditching the larger post because sometimes all it takes is a single visual to illustrate the concept. And I’m not in the business of wasting your time. So we’re keeping it short and sweet today.
What you’re looking at below is the relationship between the S&P 500 price (X axis) vs the S&P 500 forward PE ratio (Y axis) since 1990.
Every dot on the chart represents an S&P 500 price and corresponding forward PE ratio.
You can see the beginning of the timeline in the bottom left pane of the chart. That’s January, 1990.
And every subsequent month is strung together since then by a dashed line connecting each dot.
I’ve highlighted the Tech Bubble by making the dots in the two years leading up to March, 2000 dark blue. The two years leading up to today are shaded light blue.
Here are both highlighted on their own pane.
First I want you to focus on the dark blue dots during the Tech Bubble.
See how in the two years leading into the Tech Bubble, the S&P 500 price increase was being accompanied by a rising forward PE ratio?
Now look at the past two years.
The S&P 500 price increase has nothing to do with rising valuations. The forward PE ratio (remember, that’s on the Y axis) has actually fallen as the market has risen.
The two pictures couldn’t be more different.
Investors were paying more for the earnings that were expected in 2000. Today they’re paying less.
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