The ASX 200 is hitting record highs, but are stocks cheap or expensive?
$S&P/ASX 200(.XJO.AU$ Macquarie compiles regular data for the Australian stock market, typically publishing a market PE on both a forward and historical basis. The broker’s forward market PER is based on their EPS estimates for Australian stocks for the 2024 financial year, which ends on June 30 (FY24). Their historical market PER is based upon actual reported earnings of Australian companies for the half year ending December 31 2023 (CY23).
Note; professional investors prefer to use forward PE ratios rather than historical ones, but it's important to remember we are only looking at one broker’s estimate for FY24 here. Other brokers will have different views of the earnings potential of Australian stocks over this period. The benefit of including CY23 data in this discussion is that it provides a consistent basis upon which we can consider the Australian stock market’s valuation.
Note; professional investors prefer to use forward PE ratios rather than historical ones, but it's important to remember we are only looking at one broker’s estimate for FY24 here. Other brokers will have different views of the earnings potential of Australian stocks over this period. The benefit of including CY23 data in this discussion is that it provides a consistent basis upon which we can consider the Australian stock market’s valuation.
The above chart shows how Macquarie’s market PERs (left-hand axis) have changed since the major low in the S&P/ASX 200 in October last year. The benchmark index (right-hand axis) has staged an impressive rally from a low of 6751.3 to yesterday’s record close of 7763.7. That’s a 15% increase, and it doesn’t include any dividends paid along the way.
Be alert, not alarmed!![]()
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Keep in mind stocks won’t automatically drop off a cliff should the market PE Ratio breach 20. It’s just a number, and the notion that stocks are expensive above this level is just a rule of thumb. Consider also that PE Ratios based upon one point in time, even if they are forward-looking, can be misleading.
Macquarie only publishes data for its FY24 forecast. They may be predicting substantial growth in their market EPS forecast for FY25, which would cause their market PER for that year to be substantially lower than FY24’s 18.2. Remember, investors’ time horizons are much further out than June 30 this year, so FY25 and FY26 market PE Ratio estimates are likely more influential on views of current valuations.
Be alert, not alarmed!
Keep in mind stocks won’t automatically drop off a cliff should the market PE Ratio breach 20. It’s just a number, and the notion that stocks are expensive above this level is just a rule of thumb. Consider also that PE Ratios based upon one point in time, even if they are forward-looking, can be misleading.
Macquarie only publishes data for its FY24 forecast. They may be predicting substantial growth in their market EPS forecast for FY25, which would cause their market PER for that year to be substantially lower than FY24’s 18.2. Remember, investors’ time horizons are much further out than June 30 this year, so FY25 and FY26 market PE Ratio estimates are likely more influential on views of current valuations.
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