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Why the S&P 500 P/E Ratio Spiked During the Financial Crisis

Article Quant Q&A · Author: The Nightman
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Summary

The document addresses a historical spike in the S&P 500 price-to-earnings ratio around the financial crisis. Its brief answer attributes the movement to a collapse in reported earnings, particularly earnings from banks, which raised the ratio even as stock prices were under pressure. Because P/E divides share prices by earnings, a sharp fall in the denominator can produce a large increase in the ratio without requiring a comparable rise in prices.

The response points readers toward an earnings history series as supporting context, but provides no figures, chart analysis, or detailed breakdown of index constituents. It therefore offers a concise explanation rather than a full decomposition of price and earnings effects. The observation concerns the cited period and does not establish that every large P/E change has the same cause.

Key ideas

  • A P/E ratio can rise sharply when earnings fall, even if stock prices do not increase.
  • The answer identifies weakness in bank earnings as a key contributor to the S&P 500 ratio spike around the crisis.
  • Interpreting a P/E move requires examining both its price numerator and earnings denominator.
  • The brief response gives no quantitative decomposition or detailed constituent analysis.

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EquitiesUS marketsStatistics
Full text
# S&P P/E Ratio 2008 Spike Explanation


# S&P P/E Ratio 2008 Spike Explanation












I'm looking at S&P PE ratio chart over time, and there is a large spike around 2008, and I'm trying to understand the reason for this change. Is it simply that earnings declined so sharply that P/E was quickly elevated?

For reference this is an example chart.

## Answer by Anon (score 3, accepted)

https://quant.stackexchange.com/a/32096

Bank earnings specifically, but yes.

http://www.macrotrends.net/1324/s-p-500-earnings-history

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.