Tag Archives: P/E Ratio

A Few Data Points on Current Valuations

Earlier this week a friend asked me about the recent volatility in Capital Markets … which by the way are really just going back to normal times ….

My Answer ….

“We got ahead of ourselves and valuations are a bit high!”

His comment …

No way, earnings are good, markets cannot be overvalued!”

Let’s take a look and see for ourselves?

Check Points on Current Valuations

Price Earnings of the S&P 500

4-17-18 PE Ratio SP 500

Currently 24 with a  long term average of 15

Shiller or CAPE Price Earnings – 10 year average Price Earnings

4-17-18 Cape Ratio SP 500

Currently 32 with a long term average around 17

Price to Book Value

4-17-18 Price to Book SP 500

Currently 3.31 with a  long term average of 2.75

So what does it all mean?

We are not WAY overvalued, overvalued compared to historical averages ….we are not cheap either …. but still maybe ahead of ourselves … leading to a good excuse for battle grounds and perceived volatility (again, really just back to the normal).

Want the Good News?

Right now earning are expected to grow about 15-20% this year. If they do, and the capital markets do not go up that much, (very likely) we are now less overvalued, and risk may be lower!

Bottom Line … Patience this year will be needed!

Have a Great “Valuation Updated” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.



Earnings, a key driver to Capital Markets/Asset Appreciation … Friday

By a lot of metrics, capital markets may be frothy (our term), overvalued, or some even saying a “Bubble” (WAY over used in our opinion) ..
With a long term average of 15, a 24.6 Price to Earnings ratio (Prices divided by cumulative earnings of the capital market), the bluntest valuation instrument MAY be frothy.

BUT if earnings continue to grow, it would be logical for assets to at least maintain their levels and possibly even continue to appreciate, ESPECIALLY if the future looks bright!

Those steep declines represent a corresponding decline in asset prices… note this chart is going back to the 1800’s … we like long term views such as this…

Next week we will review the “here and now” of earnings and growth/sales  as we are in the middle of the 90 day treadmills we call earnings season….

Ahh… that is next week, today is Friday, enjoy your summer weekend !

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.

Everybody is Happy! Q 1 Cover Letter

Everybody is Happy!

From Bloomberg Consumer Sentiment to Gallup Polls to the Conference Board and to our University Of Michigan Survey of Consumers (Multiple Polls reviewed in detail in our most recent Newsletter-coming to you soon) all are pointing higher, with some even pointing to all time highs.

A more pro-growth tone seems to have put wind in the sails of those polled as well as capital market participants. Heck, the most recent quarter even garnered an interest rate increase of a small .25% in the shorter term Federal Funds rate. Looking back just over a quarter and including December of 2016, there are now two interest rate increases under the FOMC’s (Federal Open Market Committee’s) belt. The first rate increase in this economic cycle, post 07-09 Great Recession started in December of 2015. According to many, created the “record breaking” rocky start a year ago. Fast forwarding to today, market participants and the economy for that matter, seem to welcome a normalization of short term rate increases.

Speaking of rate increases, under normal circumstances all other items being held equal, which then never are, interest rate increases are a muzzle on the economy and in many cases are the cause of a larger slowdown or recession. The problem with this comparison is rarely have short term rates been zero, which they were held at for over five years in this economic cycle. It is possible that an increase of rates from such a low level to a more normal level may actually be energizing rather than resistance as past comparisons may show.

Is there a downside?

Capital markets look forward, usually 6-12 months. All this positive sentiment has led to stretched valuations from a historical point. The current Price/Earnings ratio, again shown in our latest newsletter, finds itself at 26, with a long term average of 15. Just as economic cycles do not die of old age, capital markets do not go down just because their valuations may be stretched. Higher valuations can lead to less room for errors, not a time to let our guards down and also not a time to be swinging for the fences, however valuations can return to normal simply with all this positive sentiment translating into higher world capital market earnings. Said another way, “Growing into the current Valuation.” Time will tell, and we will be watching closely.

Spring seems to finally have sprung, enjoy !


John A. Kvale CFA, CFP

Enclosure (Q 1 Report)

September 2013 End of Quarter Capital Market Review (Video.. 2 minutes finally)

The FOMC provided fireworks in September, clearly the biggest event of the month which caught participants off guard. Before we jump to that we wanted to discuss the most common valuation method for capital assets, the P/E ratio, and it’s value as of today.

September Video Review

P/E Update Chart

This P/E Chart is from the S&P 500 and is based on Operating Earnings (takes one time items earnings numbers out.)  Our original thinking was to show you how we compare today to the past, and how frothy we are today…wrong… from this info. With a 24 year chart (thanks Donald) visually, we are not that overvalued. We would argue that this time period was unusual and we are still frothy compared to a more normal period of time.  Looking to the second chart, from Multpl.com which goes back to the 1800’s it gives a more normalized ratio. There is absolutely no possibility that the historical data is as accurate as our most recent. But it shows a more normal ratio over longer time periods.

Bottom Line: As you can see the market can get more expensive and continue to rise. If history repeats itself, the downside happens much faster then the up.

10-2-13 SP Op Earnings PE

10-2-13 PE Ratio Chart

FOMC U-Turns on Taper

We are still puzzled on the reasons, but no matter, Big Ben and the FOMC crew turned on a dime and decided not to reduce the QE stimulus (bond purchases to keep rates lower) even after repeatedly saying they were. When the book is written we will know what occurred, our suspicion is there is more than meets the eye.

Our problem is expectation and credibility. The capital markets were clearly ready for the much-needed reduced stimuli but U-turning, participants were caught off guard and had to quickly adjust portfolios, fabricating certain positive movements. The FED had almost guaranteed they would reduce the stimuli numerous times, leading most including ourselves to an expectation of much-needed reduction.

UPDATE: Government Shutdown…DID THEY KNOW??

9-27-13 FOMC SPY Punchbowl

 Larry Summers V Janet Yellen as FOMC President

Three days before the FOMC U-turn move on taper, word hit the street that Larry Summers had declined the job as president of the FOMC.  While no one knows how close he was to being  nominated, it is a well-known fact that Larry Summers supports our view of less taper sooner (hawkish.) Janet Yellen is thought to be more dovish (supports extended stimulus.)  During the Greenspan era it was hard to recall a dissenting vote. Bernanke has openly allowed dissenting votes. It could be possible the next chair may actually lose a majority vote at some point during his/her tenure….We are the only ones that we know of that would ever even say this at this time….time will tell !

Summers V Yellen

Financial Times Inheritance Article/Interview

A very proud moment in September was our neat article on inheritance planning. The article ran on a Financial Times Service and was also picked up by the Wall Street Journal. While this article is not directed at clients, more for advisors (making it even more flattering) we have dissect the details in an earlier post as we have enormous experience in the matter and this is a huge item to occur over the next several decades.

FT Article John Kvale

Don’t forget the spooky month we are in, however often times the fireworks begins in this quarter and push through the end of the year.

Have a Great Friday!

John Kvale

8222 Douglas Ave # 590
Dallas, TX 75225

Underestimating the beast…..On the Road Again

As we happily ride capital markets higher and watch their continued ascent, we are struck by our underestimation of the beast that aggressive participants can be as money enters the capital markets.

Eyes wide open for Clues and Confirmation

We are watching so close for clues either economically or via company to validate the recent moves…so far…well…we are watching. A fellow professional investor and dear friend made a very accurate comment to me this week that the P/E (Price Earnings ratio) is more of a confidence indicator than a valuation. He is correct and confidence is at high levels now…..and looks to get more confident! (Hat tip Mark)

On the Road for the Weekend

Just after market close we (family, friends, and myself) head to the land of the Alamo (San Antonio) for multiple business meetings, fun, family, and fellowship, along with a Mother’s day celebrations. Mother's Day

Next week brings a short week as we are out of the state on Thursday and Friday…but that is next week…enjoy your Friday and your weekend… be safe AND…..

Happy Mother’s Day Mom’s!

John Kvale

PS New special order super server is on order…yaa yaa….Nerds !!

PSS 6:45 am Tennis lesson this am with my 8 year old…..and she wanted to go…Wow!!!



8222 Douglas Ave # 590
Dallas, TX 75225

Earnings Update, The P/E Ratio, Frozen Tundra (DFW Texas), Travel Schedule

In our earlier Earnings (90 day treadmill) update and Economic post we mentioned we would update the earnings picture and also add a few “Non Wall Street” examples for simplification.

According to Thompson Reuters, 44% of the S&P 500 Companies have now reported (90 day treadmill) with 77% beating expectations with about a 5% upside surprise.

An Example of why we watch this: The P/E  Ratio, One of Many Factors

As promised earlier, we wanted to simplify a “Wall Street” lingo item and explain how it impacts the capital markets.

Most of you are familiar with home ownership and purchasing, so let’s use price per square foot as a simple example to demystify a bit of “Wall Street” lingo. Think of P/E (Price divided by Earnings) as a parallel to price per square foot of a home. As the value of the capital markets increases, earnings must also rise in order for the Price Per Square foot (P/E) not to go up as well. 

Is it as simple as that? Well not really

As an economy runs through a normal economic cycle of peaks and troughs of earnings growth, the P/E will expand as earnings grow and shrink as earnings fall.  

There is one other item, market participants put the greatest importance on future earnings, so estimated profits and company predictions are much more important than current earnings. 

The average forward P/E ratio is around 15, depending on the time frame measured, again think of this as Price Per Square Foot.

So where are we now?

According to our favorite service AFG View, the S&P 500 is trading at a forward 14 P/E and expected growth rate of 12%.

This has quickly become more detailed than I had originally intended, so in order to keep your eyes from glazing over further, I will move on and expand more in the future.

Frozen Tundra in DFW

Last night, meteorologists correctly predicted a cold blast here in the Dallas

2-1-11 Kvale Home Dallas Texas

 Fort Worth Area, as such, the local area is moving rather slow this morning as it is debatable on local driving skills given normal weather conditions! HaHa

Travel Schedule

Not withstanding the weather conditions, I will be traveling to San Diego CA tomorrow afternoon, fingers crossed for a timely departure, for an excellent investment related conference. My return should be interesting on Saturday as many last-minute Super Bowl attendees will most likely share our return destination.

Have a Great Day !