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Exponential P/E

Exponential P/E


"For bubbles, I want a systematic way of identifying them. In my view It is a simple proposition. You have to be able to predict that there is some ending to it. All the test people have done trying to do that they can't do it. So statistically people have not come up with ways of identifying bubbles. I think that there is a lot of identification of bubbles based on 20/20 hindsight and it very easy to do with that situation".

Eugene Fama
Fama and Thaler debate - July 9, 2016


I created this web page on July 7, 2009 and have been updating it weekly. This is my modest attempt at trying to show ex-ante that for the last several years the stock market has been in a massive bubble. I will point out that while I believe there is an ending to it, the one thing I cannot predict is when

The following charts are based on Professor Robert J. Shiller's online data base. While Professor Shiller uses a 10-year moving average of inflation adjusted S&P 500 composite earnings to calculate the S&P 500 price earnings ratio, I recommend using the exponential regression of inflation adjusted S&P 500 composite earnings and the inflation adjusted earnings from Cowles and Associates (Common Stock Indexes) for the last 138 years to calculate the S&P 500 P/E (i.e. an exponential P/E).

A 10-year moving average of earnings was used by Benjamin Graham when calculating the P/E ratio for individual companies. While a 10-year moving average can do a good job smoothing out a company's short-term earnings fluctuations it may not be up to the task when dealing with abnormally elevated or depressed S&P 500 profit margins over extended periods of time.

Because Professor Shiller's data is inflation adjusted the exponential P/E will react to inflationary trends. Rising inflation will cause the exponential earnings trend line to rise, which will result in the current exponential P/E being adjusted downwards. Historic exponential P/E will remain relatively stable due also to the upward adjustment of the past S&P 500 index values.

While the vast majority of investors find the scenario of a S&P 500 P/E of 10 extremely unlikely (no matter what earnings measurement one uses), I believe that if a given outcome is possible, even if highly improbable, it must be taken into account. Please keep in mind that given high inflation, the S&P 500 does not need to fall to 499 to hit an exponential P/E of 10 (based on July 3, 2009 exponential earnings of $49.99). A rise in the inflation adjusted exponential earnings trend line could push an S&P 500 exponential P/E low of 10 to an S&P 500 value of 600, 700 or more.


The S&P 500 exponential earnings will change over time due to changes in future reported earnings, adjustments for inflation and compounding. I plan to update the S&P 500 exponential earnings trend line on a quarterly basis to reflect current reported earnings and inflation.

Professor Shiller's S&P 500 monthly values are based on a monthly average of daily closing values. Because I wish this web site to show the current performance of the market, I plan to update the web site on a weekly basis using the most recent weekly S&P 500 closing value (closing value of the last business day of the week) with the prior monthly values based on Professor Shiller's monthly average of daily closing values. Between weekly updates, in order to obtain the current S&P 500 exponential P/E, the current S&P 500 value can be divided by the exponential earnings found in the table at the top of this web page.

Since it is rather hard to see the current S&P 500 value and exponential P/E values on the 1871 - 2015 charts I am including charts for 1982 - 2019.


I would like to point out that Exponential P/E has absolutely nothing to do with my Hedge Strategy. It only exists as an academic exercise to satisfy my curiosity about the very long term performance of the stock market. It has no relevance in terms of trying to "time" the market.

Exponential regression of inflation adjusted S&P 500 reported earnings 1871 to 2012

S&P 500 inflation adjusted earnings