16.34 — 40-year average of S&P index's price-to-earnings ratio. Yet, the top 5 tech companies are now trading at nearly twice that number.
Over the past 40 years, the 500 stocks comprising the benchmark Standard & Poor's Index have averaged a price-to-earnings ratio of 16.34.
At its core, a PE ratio tells investors how many years it will take for the earnings from the total outstanding shares of a company to equal the current share price. Conventional wisdom says that a stock with a high PE ratio shows that investors believe the company has sound growth opportunities.
Despite the unprecedented crash in technology stock valuations over the past two years, many of the leading software and hardware issues still have plenty of downside ahead compared to their nontechnology brethren.
In the first week of April, Microsoft, Oracle, IBM, EDS and Hewlett-Packard had an average PE ratio of 31.62. Two years earlier, at the peak of the tech stock bubble, these same five stocks were trading at an average PE ratio of 68.42. In April 1998, they averaged 34.14.
In the first week of April, a core group of non-tech issues including Wal-Mart, American Express, General Electric, Philip Morris and General Motors traded at an average PE ratio of 28.07. These same stocks were trading at 24.72 in April 2000, again at the height of the boom, and 24.44 in April 1998.
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