Historically, the SP 500’s PE has been around 14-15.
Bullshit!
I actually believed this garbage until I started digging into the numbers myself. Using the numbers from here, I’ve discovered that PE’s have been increasing for a loooong time. This average of 15 no longer exists.
| Average PE | Since |
|---|---|
| 23.91 | 1990 |
| 20.48 | 1980 |
| 18.82 | 1970 |
| 18.68 | 1960 |
| 17.59 | 1950 |
| 16.81 | 1940 |
| 16.79 | 1930 |
| 16.38 | 1920 |
| 15.89 | 1910 |
Now this can be misleading because they can get thrown off by outliers. So instead lets look at the median. According to http://www.multpl.com/ the median is about 14.5.
| Median PE | Since |
|---|---|
| 20.35 | 1990 |
| 18.08 | 1980 |
| 17.68 | 1970 |
| 17.76 | 1960 |
| 17.24 | 1950 |
| 15.56 | 1940 |
| 16.28 | 1930 |
| 15.43 | 1920 |
| 14.88 | 1910 |
So it seems strange to say, but it looks like a PE of 20 is the new normal. At least looking at the last 25 years. And despite such high multiples, the rate of return over that time frame has been 9.6%, which is inline with the the 9.9% rate of return since 1965. <source>
I suppose the question may become why has PE been increasing? Is it a bubble?
Are stocks more expensive? Perhaps.
I would speculate that disposable income has grown considerably over the last 100 years, so people have more money to invest.
Written in 2015.
2023 Update: I would add that of course a bunch of mega-tech stocks with ridiculous ROIs and huge runways are going to demand higher multiples than the railroads and chemical stocks of yesteryear. Higher growth potential will demand higher multiples.