The S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - June 2013

This is the monthly review of the S&P500 including a couple of S&P 500 valuation metrics.  Last month’s review can be found here.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,627.  That is a fall of 0.8% when compared with 1,640, which is the average closing Price of each trading day last month.  It is 22.9% above last year’s June monthly Price of 1,323.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I’m a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Click to enlarge

S&P500 Earnings

As Reported Nominal Annual Earnings (using a combination of actual and estimated earnings) are currently $90.96.  That compares with this time last year at $87.92 implying earnings growth of 3.5% year on year.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.