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The high P/E is driven by interest rates being low. One can argue the way to judge stocks value is not by P/E but by E/P relative to interest rates; that is wh
by usaar333 11y ago
The high P/E is driven by interest rates being low.
One can argue the way to judge stocks value is not by P/E but by E/P relative to interest rates; that is whether their excess return relative to risk-free assets is justified by their risk.
Interest rates remain 5% below their long-term historical average, which can justify E/P going up significantly. Currently stocks offer a 3.5% return over some classes of t-bonds, well in line with historical norms.
- mathattack 11y agoThis is very true. It's earning yield versus fixed income yield that matters most. If one is out of whack with the other, then there there is arbitrage. (All things equal, if there's a much better yield in equities, then people will move money from bonds to equities, or vice versa) The current danger is that both will move down at the same time, and then where should one invest?