Lower Prices—But Not Cheaper

THE S&P 500 SLIPPED 0.7% in 2015. For those who prefer to buy their stocks at reasonable valuations, this should be cause for mild optimism. After all, even as share prices went nowhere over the past 12 months, the U.S. economy was continuing to grow, which means stocks ought to be better value.

Except they aren’t—at least as measured by the S&P 500’s price-earnings (P/E) ratio. As of Dec. 31, the S&P 500 companies were collectively trading at 22.95 times trailing 12-month reported earnings, versus 19.67 a year earlier, according to WSJmarkets.com. What gives? Even as share prices were going nowhere during 2015, corporate earnings were falling, so the market’s P/E has climbed.

Not all the news is bad. As of Dec. 31, the S&P 500 companies were kicking off a dividend yield of 2.14%, versus 1.92% a year earlier, suggesting stocks are now slightly better value. Meanwhile, the S&P 500’s cyclically adjusted price-earnings ratio, which compares current share prices to 10 years of inflation-adjusted earnings, has fallen over the past year, dipping to 25.9 from 26.8, again suggesting that stocks are slightly better value. So should we be more or less bullish? The grim reality: Whichever market yardstick you look at, it would be hard to argue that stocks are cheap.