U.S. stocks are off to a good start this year, with the S&P 500 Index up 7.66% on a total return basis as of 2/19/13.¹ As stocks have risen, so have valuations. At the end of January, the price-to-earnings ratio on the S&P 500 Index was 14x, a level last seen nineteen months ago.² Even though stocks clearly are not as cheap as they were even two years ago, we believe these valuations are reasonable. And, on a relative basis, stocks continue to be cheap to Treasuries and high yield bonds, as I mentioned recently. But what does this mean going forward? Can P/Es rise from here?

Given the recent strong inflows into equities and increasingly bullish sentiment, it would not be unexpected for the market to pullback. Over the longer term, however, market fundamentals, in my view, support the prospect of a bull market with considerable time left to run. If we are in a new secular bull market, then there is certainly room for P/Es to rise. As this week’s OppChart shows, P/Es have historically more than doubled from the start to end in past secular bull markets in equities.³ To put that in perspective, multiples have risen by only half since the market bottomed in March 2009. Although March 2009 has not been declared an official start of a secular bull market, markets have been in a general uptrend since then.

March 2009 is not an official start to a secular bull market per Ned Davis Research. It marks the most recent trough (low-point) in the S&P 500 Index.
Source: FactSet, Ned Davis Research, 1/31/13. Price-to-earnings ratio is a valuation ratio of a company’s current share price compared to its actual per-share earnings over the last 12 months. Secular bull and bear market dates determined by Ned Davis Research. A secular bull market is a period in which stock prices rise at an above-average rate for an extended period and suffer only relatively short intervening declines. Index definitions can be found at end of post. Past performance does not guarantee future results.

1. Source: FactSet, 2/19/13. Past performance does not guarantee future results.
2. Source: FactSet, 1/31/13. Price-to-earnings ratio is a valuation ratio of a company’s current share price compared to its actual per-share earnings over the last 12 months. Past performance does not guarantee future results.
3. Source: FactSet, Ned Davis Research, 1/31/13. Past performance does not guarantee future results.

Index definitions:

The S&P 500 Index is a broad-based measure of domestic stock market performance. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Past performance does not guarantee future results.

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