How Far Down?

I calculated the historic average S&P 500 P/E ratio going back to 1871 using the data available on this website. The historic average P/E ratio is 15.98. The math is as follows:

Current P/E Ratio = 20.58
Historic Average (Going back to 1871) = 15.98
Difference = 7.13
Difference Divided By Average (7.13/15.98) = 44.62%

So, by simple math even after a 20.6% correction so far in the S&P 500 this year (as of 729/22) the S&P 500 is STILL over 44% higher than the long-term S&P 500’s P/E average.

As I have written elsewhere, markets don’t tend to go from overvalued to fairly valued. They go from overvalued to undervalued. If that is the case then we may have much further to go on the downside.

A possible counter-argument is that if you calculate the average P/E ratio of the S&P 500 since 1950 then the average P/E ratio balloons to 18.23 in which case the current market is only overvalued by 12.89% ((20.58 – 18.53)/18.53).

So, in this scenario, if we go to undervalued, as is usually the case, then we may have another 15% to 20% on the downside from here.

To add more fuel to the bear market case, as recently as 2012, the S&P’s P/E ratio was 14.87. If we use that number as our floor then the current market is still 38.4% ((20.58 – 14.87)/14.87) overvalued.

I remain very bearish at this time…