"Stocks are now trading at p/e ratios not seen since 2004. This is more than pricing in a recovery — this looks very much like pricing in a return to the status quo ante. Does anybody really still think that corporate profits are going to be able to rise faster than US GDP indefinitely? It seems from the level of the stock market that, yes, they do."
See the chart at the link. However, the main reason that P/E is high is not that prices are high, it is that earnings are unusually low. In the absence of bubble psychology, prices should stay fairly stable since they are the forecasts of future earnings streams, but earnings are certainly very volatile. Thus, the P/E should fluctuate during recessions and really ought to be higher during downturns than it is during booms.
No comments:
Post a Comment