Sector Valuation: Shiller P/E by Sectors

Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market's valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. Members can access to the Shiller P/E for S&P 500 companies by click here.

GuruFocus Shiller P/E page gives us an idea on where we are with general market valuations. But the market is rarely balanced. Some sectors are more undervalued than the others. With this page we present the Shiller P/E for different sectors. You will be able to see which sectors are more undervalued than the others.

The 500 companies can be divided into 11 sectors. Each sector contains different number of companies.

SectorNumber of StocksShiller P/ERegular P/E
Financial Services6715.6013.60
Consumer Defensive3723.7023.00
Basic Materials2225.0018.10
Communication Services2230.5026.90
Real Estate3139.1040.00
Consumer Cyclical5942.2031.60
S&P 50050031.125.1

How Is the Shiller P/E by Sectors Calculated?

1. For each sector, get the net income of the companies over the past 10 years. If the company reports quarterly, then quarterly data is used, otherwise annual data is used. Moreover, if the company's finanical history is less than five years, then it is not included in the calculation.

2. Adjust the past net income for inflation using CPI; past net income are adjusted to today's dollars.

3. Average the past 10 years' inflation adjusted net income to get E10.

4. For each sector, use the daily market capitalizations of the companies. The total market capitalizations of sector is the summation of each company within the sector.

5. Shiller P/E equals to the ratio of the total market capitalizations of the sector divided by the total inflation adjusted net income (E10).

How is Regular P/E Ratio by Sectors Calculated?

The P/E ratio for each sector is not a simple average of the P/E ratios of individual firms in the sector. Instead, it is obtained from dividing the cumulated market capitalization of equities in the sector by the cumulated trailing 12-month net income of each firm in the sector.

* Please note that for some sector, P/E ratios may have extremely high/low values during certain periods. The reason behind this is that the cumulated trailing 12-month net income of the sector is obtained by adding up the trailing 12-month net income of each firm in the sector, which is susceptible to cyclical or seasonal changes in the net income of some particular company. It also illustrates how regular P/E ratios can be deceptive.

Why Is the Regular P/E Ratio Deceiving?

The regular P/E uses the ratio of the S&P 500 index over the trailing 12-month earnings of S&P 500 companies. During economic expansions, companies have high profit margins and earnings. The P/E ratio then becomes artificially low due to higher earnings. During recessions, profit margins are low and earnings are low. Then the regular P/E ratio becomes higher. It is most obvious in the chart below:

The highest peak for the regular P/E was 123 in the first quarter of 2009. By then the S&P 500 had crashed more than 50% from its peak in 2007. The P/E was high because earnings were depressed. With the P/E at 123 in the first quarter of 2009, much higher than the historical mean of 15, it was the best time in recent history to buy stocks. On the other hand, the Shiller P/E was at 13.3, its lowest level in decades, correctly indicating a better time to buy stocks.

Investment Strategies at Different Market Levels

The Shiller P/E and the ratio of total market cap over GDP can serve as good guidance for investors in deciding their investment strategies at different market valuations. Historical market returns prove that when the market is fair or overvalued, it pays to be defensive. Companies with high quality business and strong balance sheet will provide better returns in this environment. When the market is cheap, beaten down companies with strong balance sheets can provide outsized returns.

To summarize:

1. When the market is fair valued or overvalued, buy high-quality companies such as those in the Buffett-Munger Screener.

2. When the market is undervalued, buy low-risk beaten-down companies like those in the Ben Graham Net-Net Screener. Buy a basket of them and be diversified.

3. If market is way over valued, stay in cash. You may consider hedging or short.



Sector Shiller P/E: Which Sectors Are Better Positioned for Higher Returns

Financial Services

Consumer Defensive


Basic Materials