I want to calculate the P/E ratio for the different sectors in the S&P500. To do this I'm dividing the sector's index price (found on their website) by the sector's earnings per share. When I do this I get results that are in the 60-80 range almost for every sector, which I find strange.
Am I doing this the correct way?
To calculate a sector (or index) P/E ratio you need to sum the market caps of the constituent stocks and divide it by the sum of the total earnings of the constituent stocks (including stocks that have negative earnings). There are no "per share" figures used in the calculation.
Beware when you include an individual stock that there may be multiple issues associated with the company that are not in the index.... eg. Berkshire Hathaway BRK.B is in the S&P 500 but BRK.A is not. In contrast, Google has both GOOGL and GOOG included in the S&P 500 index but not its unlisted Class B shares. All such shares need to be included in the market cap and figuring out the different share class ratios can be tricky.
For the S&P and many other indices (but not the DJIA) the index "price" is just a unitless number that is the result of a complicated formula. It's not a dollar value. So when you divide said number by the earnings/share of the sector, you're again getting just a unitless number that is incomparable to standard P-E ratios.
In fact, now that I think about, it kinda makes sense that each sector would have a similar value for the number that you're computing, since each sector's index formula is presumably written to make all the index "price"s look similar to consumers.
