The table below lists the current & historical CAPE ratios by sector of S&P 500 companies. If the Shiller PE ratio of a sector is considerably lower than its historical average, this is argued to indicate that the sector is undervalued and vice versa. The overall CAPE of the index as a whole is currently 26.54 (Oct 12th 2016). Combine this dataset with Sector Specific Total Returns and examine the relationship between the ratio and sector performance.
Full full data, check the Sector Valuation Dataset by Siblis Research.
S&P 500 CAPE (Shiller PE) Ratios by Sector
Purchase sector specific P/B, P/E and CAPE ratios for the last day of each month since 12/31/1979 and do your own valuation analysis.
Need the full raw data? Purchase S&P 500 Sector Valuation Dataset by Siblis Research that includes all the formulas and data used to calculate the CAPE ratios, including quarterly earnings, outstanding shares and share prices of all current & past index components since 3/31/1979. The dataset includes also the sector specific Total Performance Indeces (dividends included) that allow you to examine the sector returns since 1/31/1970. Check the sample file from here.
How are the sector specific Shiller PE ratios calculated?
Below is a short summary how the values are calculated. Examine the researcher dataset with full raw data to see the actual formulas that have been used (check sample file from here).
- Collect quarterly earnings, outstanding shares and share prices of all current & past S&P 500 companies for the required period.
- Calculate the quarterly earnings of all companies (part of the index during a specific period) representing a specific sector. Adjust the earnings if the number of companies representing the sector has changed between quarters.
- Apply consumer prices index factors to cyclically adjust the quarterly earnings of the sector.
- Calculate 10-year average of cyclically adjusted earnings.
- Divide the 10-year average earnings with the total number of common shares outstanding of companies belonging to the sector to calculate sector specific EPS.
- Calculate the average share price of companies part of the sector, adjusted by the number of outstanding shares.
- Calculate CAPE by dividing the adjusted average share price with cyclically adjusted average earnings-per-share.
Maybe the best way to familiarize yourself with how the CAPE ratio is calculated is to check the Excel-file that Professor Robert Shiller is publicly sharing. The file contains both the monthly data and the simple formulas used to calculate the ratio for the whole S&P 500 index.
Calculating the sector specific ratios require some extra adjustments because the amount of companies belonging to a specific sector keeps changing. For example, the financials crisis of 2008 decreased the number of financial companies part of the index from 96 to 87.
Calculating the ratio requires accurate information how the S&P 500 companies have been changing in the past (examine the previous index components from here). The earnings of one quarter are collected from the components part of the index at the end of each quarter and not from a fixed group of companies. Using only the current index components does not give the full picture of historical valuations.
The earnings are adjusted for inflation using Consumer Price Index.
Valuations in March 2016
Based on the CAPE ratios, six of the ten sectors are valued higher than their historical averages. Based on the historical earnings, Financials, Health Care, Materials, Consumer Discretionary, Telecommunications and Utilities are valued higher and Industrials, IT, Consumer Staples and Energy are valued lower than their average valuations.
Especially the energy companies are currently looking very cheap if only looking at current CAPE value. The cheap oil price is causing investors to be aware of this sector and future earnings are expected to be considerable lower than before. Energy companies have been generated heavy losses during 2015 and shares have been plummeting. But the cheap oil will not last forever and it might be that now is a good time to start adding more energy companies to your portfolio. Also IT firms have not seen this low valuation levels in over 20 years. However, it is important to remember that the average PE for Information Technology also includes the sky-high stock prices during the dot-com boom of 1999-2000.
Shiller PE and sector performance
Can the CAPE ratio be used to indicate what will be the long term performance of a specific sector? In a white paper published by Barclay’s research department and Professor Shiller (to promote the new ETN/Exchange Traded Note created by the bank), the group developed a sector rotation strategy that outperformed annual returns of S&P 500 total return index with nearly 4%. The returns are indeed impressive but it is always easy to beat the market using historical data. Time will tell if the CAPE ratio remains a useful indicator.
In February 2015, Ossiam launched an exchange traded fund (The Ossiam Shiller Barclays Cape Europe Sector Value) that revolves around European equities following the same strategy described in the paper. The ETF is traded on the London Stock Exchange.
Comparing the valuations of different sectors using CAPE
The CAPE ratios varies substantially between the sectors. In December 2015, consumer discretionary segment’s PE 10 ratio was three times higher than the ratio of energy companies. Does this mean that consumer discretionary companies are seriously overvalued?
Comparing the valuations of different industries is tricky. Investors have different expectation for the timeframe of future earnings of different companies. For some new and hot high-tech firm, most of the company’s value is based on hopes of fast growth and the current earnings of the company do not really matter. But for mature firms, the retained earnings in short timeframe are much more important. The same holds true for the whole sectors: expectations of when the money is coming in are not the same.
However, someone might raise the point that the average 10-year price-earnings of IT companies has been higher than the P/E of energy firms and utilities all the time for the past 30 years. This raises the question if the hopes of the investors have been constantly too high for some industries.
Some sectors traditionally viewed as cyclical, like consumer discretionary and IT, have higher average CAPE than defensive like utilities and consumer staples. But the average Shiller price-earnings ratios of consumer staples (defensive), health care (defensive), materials (cyclical) and industrials (cyclical) are very close to each other.
Global Industry Classification Standard (GICS)
GICS industry taxonomy is used to assign a company into one of the ten sectors based on the company’s principal business activity. The taxonomy system has also 24 industry groups, for example Industrials is divided into Capital Goods, Commercial & Professional Services and Transportation.
The system does not have a class for conglomerates. The most famous of conglomerate, Warren Buffet’s Berkshire Hathaway, is currently assigned to Financials.
S&P Dow Jones Indices and MSCI, companies that are maintaining the classification system, have announced that Real Estate will be created as a new sector, making the total number of main classes to be 11. Real Estate is currently part of Financials. The change will take effect on August 31, 2016.