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Last week I posted a brief article that highlighted the cyclical P/E ratios of the Tech Bubble: Market Valuation, Inflation, and the Tech Bubble. Here is the chart I featured, followed by an alternate reality chart in which the Tech Bubble vanished in a time warp. How would P/E ratios have been affected? What would the current market valuation be like if the nearly five years from May 1997 to March 2003 were removed?
Since 1871 average (arithmetic mean) cyclical P/E10 only drops from 16.4 to 15.8, and the nominal TTM P/E drops fractionally from 15.5 to 14.9.
Interestingly enough, this experiment makes virtually no difference to the current P/E10 market valuation. My latest monthly valuation update reported a cyclical P/E ratio of 19.9 at the end of last month. Even with the Tech Bubble removed from calculation, the ratio only drops to 19.8.
Are there any conclusions we can draw from this little exercise? Perhaps nothing definitive. I could make numerous variations on the start and end dates for the Tech Bubble, although the ones I selected seem logical enough from the first chart. But the minimal impact on the current valuation and the upward drift of data points into the 30-35 ratio range in our fictional reality suggest that the overvaluation of today's market traces its roots much further back — perhaps to the early 1990s.
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