The next chart shows the price-to-earnings ratio for the S&P 500. As may be seen, P/E hit an all-time high in 1991 at about 26, decreased to 16 in 1994 as earnings recovered from the 1990-91 recession, and has since increased to a current value of about 23 with the 1995-97 runup in stock prices. The current S&P 500 P/E is at the upper end of its historical range and is comparable to the 1987 high of 23. Thus, from this measure of value, stocks are currently somewhat overpriced. If stocks are bought at one of the historic P/E low points, when the P/E ratio is below about 8 (e.g, in 1942, 1950, 1974, 1980, or 1982), the future expectation is much better than if stocks are bought at current levels.
Another question relating to earnings and yield is the payout of earnings as dividends. The next chart shows the payout percentage for the S&P 500. This chart shows that only about 38 percent of earnings is currently being paid out in dividends. This value is at an all-time low. This is in contrast to previous historic lows, which in the past have occurred near market low points (e.g, 1950, 1974, 1980). Since the S&P 500 index is not near historic lows by any other measure, it would appear that corporations have elected to pay out less of their earnings as dividends, perhaps because current corporate rates of return on invested capital are high, and dividends are doubly taxed.
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