Yesterday Warren Buffett wrote about stocks now being a bargain. It lead me to look at a measure of valuation I have not calculated recently, the S&P 500 PE on trend EPS. We all know there are problems with the various measures
of earnings used to calculate valuations and none of them are perfect. We could use operating EPS or reported EPS,
some measure of projected earnings, or different measures of trailing EPS. Each has its own advantages and/or drawbacks. I’ve used trend earnings to deal with these problems at different times. It uses a sort of average of both operating and reported EPS so it avoids the controversies over which of those two series to use. It also avoids the problem of basing valuations on either peak or trough EPS that sometimes creates distortions.
At Fridays S&P 500 close of 940.55 the S&P: PE on trend EPS was 12.0. This compares to an average since 1960
of about 16 and is almost exactly where the market bottomed in the 1970 bear market and after the 1987 crash.
On this basis Buffett is right that the market is cheap and looks like a long term buying opportunity. But note that at the 1974 bottom, this PE was 8.0 and it remained below 12 for years, when inflation and rates were very high.