Soaring stock prices in recent years have fueled P/E ratios to post-crisis highs. The S&P 500 has posted an impressive 14.7% gain for the past 12 months and 13.4% annualized for the past five years, as measured by the biggest ETF that tracks the benchmark index (SPY). The Dow, meanwhile, has posted similarly impressive gains over those same time periods: 17.3% and 12.9% (DIA). The P/E ratios for the indexes are now at 24.33 for the S&P and 23.63 for the Dow, according to S&P Dow Jones Indices.
Even though high P/E ratios can be a caution signal for investors, “they do not necessarily mean the market is overvalued,” says Greg McBride, chief financial analyst at Bankrate. “Strong corporate earnings growth might already be discounted in the price of the market or an individual security,” he says.
He notes that sectors can be very different in terms of valuations. “P/E ratios for certain companies or certain sectors might be elevated, or at very low levels, to reflect the growth expectations, or lack thereof,” McBride says. “High P/E companies and sectors are fast growers, but must maintain that growth rate to sustain the valuation. Low P/E companies and sectors can be great values, or they can be discarded by investors if their valuation reflects problems on the horizon.”
Scroll through to see the 20 mutual funds with the lowest P/E ratios, as well as their 12-month returns, five-year returns, expense ratios and assets. We have a tie this time at the top of the list, which we indicated in the slides. And those funds with loads also are indicated beneath the data slides. All data from Morningstar.