The 2011 article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Ed's method for determining where the market is headed. His analysis was quite compelling. Accordingly, we include the Crestmont Research data to our monthly market valuation updates. See also his latest update: Understanding Secular Stock Market Cycles.
The first chart is the Crestmont equivalent of the cyclical P/E10 ratio chart from 1871 to present. Based on the February S&P 500 average of daily closes, the Crestmont P/E of 40.8 is 169% above its arithmetic mean, 179% above its geometric mean, and is in the 99th percentile of this 14-plus-decade series.
Crestmont P/E Ratio and Inflation
I've highlighted a couple level-driven periods in this next chart: the current rally, which started in early 2014, and the two months in 1929 with P/E above the 25 level. The current period is within the same neighborhood as both the tech bubble and the 1929 periods, all with P/E above 25 and is certainly in the zone of "irrational exuberance". Note on inflation: the inflation figure is extrapolated for last month based on the previous two months.
Crestmont P/E 10 Deviation from Mean
The average (arithmetic mean) Crestmont P/E Ratio is 15.2. The chart below shows the ratio relative to its arithmetic mean (i.e., divided the ratio data points by the average). This gives a more intuitive sense to the numbers. For example, the Crestmont P/E Ratio reached its all-time high of 43.9 in November 2021, suggesting that the market price was 190% above the historic average. The all-time low in May 1942 was 5.4, which is approximately 64% below the historic averages. That's quite a range. As of February 2025, the Crestmont P/E Ratio is 169% above its historic average.
Adjusting to the geometric mean, the all-time high and low mentioned above are adjusted to 216% above and 61% below the historic averages, respectively. The chart below is adjusted to the geometric mean, which is 13.9. As of February 2025, the Crestmont P/E Ratio is 194% above its historic geometric average.
The Message of the Crestmont P/E Ratio: Overvaluation
Of course, periods of over-and under-valuation can last for many years at a time, so the Crestmont P/E Ratio s not a useful indicator for short-term investment timelines. This metric is more appropriate for formulating expectations for long-term market performance. As we can see in the next chart, peaks in the Crestmont P/E Ratio are correlated with secular market tops - the tech bubble peak and current market values being extreme outliers.
Background on Ed Easterling's Crestmont P/E
For a better understanding of these charts, please see Ed's two-part commentary here:
Ed Easterling is the author of Probable Outcomes: Secular Stock Market Insights and award-winning Unexpected Returns: Understanding Secular Stock Market Cycles. He is currently President of an investment management and research firm. In addition, he previously served as an adjunct professor and taught the course on alternative investments and hedge funds for MBA students at SMU in Dallas, Texas. Mr. Easterling publishes provocative research and graphical analyses on the financial markets at www.CrestmontResearch.com.
ETFs associated with the S&P 500 include: iShares Core S&P 500 ETF (IVV), SPDR S&P 500 ETF Trust (SPY), Vanguard S&P 500 ETF (VOO), and SPDR Portfolio S&P 500 ETF (SPLG).
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