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The P / E ratio for the S&P 5 0 0 describes the value of the index divided by the earnings of the company in
The PE ratio for the S&P describes the value of the index divided by the earnings of the company in
the index, weighted according to market capitalization. The PE ratio changes over time for two reasons:
Multiple Expansion: Investors are willing to pay a higher price for the same level of earnings.
Earnings Growth: Firms increase their earnings by reinvesting into and growing their business.
Find below a table of the price levels and earnings per share of the S&P index.
a For each year, compute the earnings growth rate, ie the change in EPS year over year.
b For each year, compute the PE ratio of the S&P index.
c Attribute the change in index from one year to another to multiple expansion and earnings growth.
Help: If then earnings growth is If
Name:
there was no multiple expansion, then the value of the index should go up by However, the
index went up by This means that of the increase in index level can be
attributed to multiple expansion. We can check: The ratio in year is and the
ratio in year is which is bigger than in year
Note that earnings growth can be negative, and also multiples can shrink from year to year.
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