The Russell 2000’s Price to Earnings Ratio is Higher Than You Think

In what will likely come as a shock to many investors, the price to earnings ratio of the companies in the Russell 2000 index of small-cap stocks has been shown to be much higher than normally reported. Most publications that report the Russell 2000’s P/E ratio apparently fail to take into account the earnings of companies that are losing money, since they have negative P/E ratios. Unfortunately, one-third of the companies within the Russell 2000 are losing money, so a large swath of companies are not being counted.

One analyst who decided to sum the market capitalization of the Russell 2000’s companies and compare it to the last 12 months’ earnings found that the true P/E ratio of the Russell 2000 was 78.7. That is a staggeringly-high figure, far higher than the 25.6 reported by FTSE, the Russell Index’s creator. Other sources stated that the Russell 2000’s P/E ratio was as high as 87.9. Those ratios for the Russell 2000 are far higher than they were even during the peaks of the dot-com bubble and the housing bubble.

That’s yet another indicator that stock markets are incredibly overvalued. Investors who want to minimize their exposure to a stock market crash should keep an eye on that P/E ratio and begin to diversify their portfolios as soon as they can.