Interest rate hikes, persistently high inflation and recession fears have pulled a key measure of the S&P 500's value to its lowest level since the early days of the pandemic. Even so, valuations are higher than they have been for most of the last four decades.

The S&P 500's daily forward price-to-earnings ratio, or P/E ratio, a measure of the index's relative value based on forecast earnings, was at 16.22x on Oct. 14, near its lowest point since March 2020, according to S&P Global Market Intelligence data.

The ratio has fallen nearly 36% since July 2020, when it reached its highest point in roughly 20 years. The decline in value has been chiefly caused by the Federal Reserve's move away from ultra loose monetary policy and inflation that has remained at 40-year highs.

The Fed has raised its benchmark federal fund rates by 300 basis points since March and is expected to hike by another 75 bps at its November meeting in its quest to combat runaway inflation. The core consumer price index, a measure of inflation that excludes food and energy prices and is closely watched by the Fed, increased 6.6% from September 2021, the largest annual increase since August 1982, the Bureau of Labor Statistics reported Oct. 13.

The decline in the S&P 500's P/E ratio does not mean that stocks are currently cheap. In the decade before the pandemic, for example, the S&P 500's P/E ratio averaged 15.51x, below its current level. The ratio is higher than where it has been for 65% of the time since 1980, according to an analysis by economists at Goldman Sachs.

Largest stocks lose big

The values of the largest stocks on the index have plummeted since the start of this year. Tesla Inc.'s forward P/E ratio, for example, is down nearly 68% on the year.

Market hammers most sectors

The S&P 500 has declined more that 20% since the start of the year when the index hit an all-time high. The index's energy sector is up nearly 42% on the year, largely due to higher oil and gas prices, but it is the lone gainer. Communication services is the worst performing sector, declining nearly 41% on the year.

Communication services valuations suffer

The five largest stocks in the communications sector have seen their P/E ratios fall by an average of 40% in 2022. The P/E ratio has fallen nearly 49% for Walt Disney Co.