The stock market (measured by the S&P 500) rose 4% last month, hitting levels not seen since July of last year. P/E ratios rose last month — a sign of good things to come. 2012 is turning out to be a winner.
The chart to the right is Value Line’s Median of Estimated P/E Ratios of all stocks with earnings. This chart turned up last month. In simple terms P/E’s are rising.
Value Line’s P/E for stocks rose to 15.1 last month, the highest level since July of last year, when the P/E was 16. In fact the average P/E through the first seven months of 2011 was 16.4. I think P/Es will continue to climb.
That’s good news. P/E’s were low during the second half of last year (between 13.3 and 14) due to political unrest overseas and the European financial crisis. The reason the stock market was weak during that time was because P/E’s were coming down — even as profits rose. Our economy was fine — profits were growing — but lower P/Es was the reason the stock market fell. That all looks to be behind us now.
Due to the combination of P/E’s expanding, and profits continuing to grow around 10%, I feel the market should rise around 25% in 2012.
