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The denominator E goes up over time. If ratio is constant, then P also goes up.
by myle 7y ago
The denominator E goes up over time. If ratio is constant, then P also goes up.
- samvher 7y agoYes I think that makes sense. If you have real economic growth that can cause E to rise and through that mechanism P to rise. But even without economic growth, by reducing expected returns, you can keep E constant and get P to rise by increasing the P/E ratio. My sense is that historically the first mechanism was more important, but in the last 10 years the second played an important role.