CHEAP OR EXPENSIVE

This is a chart of the All Ordinaries PE compared to the S&P 500 PE since 1987. These are datastream calculated P/E ratios, other brokers and strategists will quote you other numbers. Since 1987 the average All Ordinaries PE is 17.4x and the average S&P 500 PE is 20x. The S&P 500 PE is now sitting at 23 x. The S&P 500 has seen a significant but arguably justifiable rise in the PE in the last ten years thanks to the growing market capitalisation of the US technology sector. At 23x the US market is clearly a little vulnerable. The last time the S&P 500 PE was up here was during the tail end of the tech boom. We appear to be having another one. And that highlights the major risk in the US, some sort of loss of faith in the technology sector earnings numbers. About the only foreseeable cause for that would be a global government vendetta against technology stocks aimed at circumventing their smarty-pants tax structures. No sign of that happening yet although Trump has it in for Amazon and could well lead the cause. An “anti-profitable technology companies” vibe could develop one day but for the moment the idea is benign. The underpayment of tax by big US corporates is the King with no clothes. Everybody can see it’s wrong but nobody is doing anything about it.

Meanwhile the Australian market PE at 16.95x is below the average of 17.4x since 1987. There is nothing demanding about it at the moment and as you will see, over the last year, despite the market going up the Australian market PE has dropped from 21.2x to 16.95x. In other words earnings have been rising more than the share prices. Healthy stuff. Nothing to worry us here.

 

Source: Marcus 16th May 2018

 

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