Tags: stocks | PE | valuations | S&P 500

Experts: Stocks Frothy With P/E Ratio Near 4-Year High

By Dan Weil   |   Monday, 12 Aug 2013 09:13 AM

The price-earnings (P/E) ratio of the Standard & Poor's 500 Index has reached an almost-four-year high, leading some experts to view stocks as overvalued.

The S&P 500 has a P/E ratio of 14.5 based on earnings forecasts for the next 12 months, according to FactSet. That's the highest monthly number since September 2009, The Wall Street Journal reports, and it exceeds the 14.2 average of the last 10 years.

"Valuations have gotten ahead of fundamentals," Michael McGarr, manager of the Becker Value Equity Retail Fund, tells The Journal. "With valuations up here, ... there is some vulnerability in the market."

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The P/E ratio has increased as stocks soared and earnings stagnated. The S&P 500 has soared 18.6 percent so far this year, while second-quarter profits are on a pace to gain only 2.1 percent from a year ago, according to FactSet, The Journal reports. That compares to a 3.4 percent gain in the first quarter.

Valuations have become "less attractive," Kate Warne, investment strategist with Edward Jones, tells The Journal. "Earlier in the year, there was an expectation that we were in a soft patch and things would be getting better. Now, there's greater concern that we won't see much improvement" in the economy and corporate earnings.

Some experts say earnings expectations are too high going forward. If true, that means the current P/E should be even higher.

Mike O'Rourke, chief market strategist for Jones Trading, is one who thinks that stocks are overdone. "A lot of this rally has been a multiple-expansion rally," he told CNBC.

"We know earnings are up, but most of that growth came in 2010. Even this year's been a better earnings year, but we see a lot of low-quality earnings beats. And I think the market does see that."

He expects the S&P 500 to hit 1,500 or below in the next six to 12 months. The index closed at 1,691.42 Friday.

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