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What's the average P/E ratio these days? 20-ish? That implies a direct return of 5% (what's the English word for this?), assuming no future growth or reduction
by marvin 6y ago
What's the average P/E ratio these days? 20-ish? That implies a direct return of 5% (what's the English word for this?), assuming no future growth or reduction in earnings.
That's a low risk premium if you measure it against historical interest rates, but it doesn't seem completely unreasonable when interest rates are expected to be ~0% for the forseeable future, and the inflationary pressure on the dollar could be on the order of 40%.
It's certainly very high in historical terms, but you can't consider the history in isolation.
- bradleyjg 6y agoWhich earnings are you calculating P/E ratios from? Q1 2020 doesn’t seem like a great metric given how different Q2 has been so far.
- dforrestwilson 6y agohttps://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio Average, but to believe it you have to assume the E doesn’t change meaningfully over the next couple of months.
- nycdatasci 6y agoJust to provide some data to back up your point: Forward earnings yield (from analyst forecasts & company guidance) for the S&P 500 is 4.84% vs 0.67% for 10 yr treasuries. This document looks at the historical trend from a variety of perspectives: https://www.yardeni.com/pub/valuationfed.pdf https://www.yardeni.com/pub/valuationfed.pdf Current valuations are roughly in line with post-2008 history, but looking at a longer history suggests that they’re actually undervalued relative to other assets.
- deleted 6y ago[deleted]
- alexpetralia 6y agoThe word you're looking for is "earnings yield."
- IkmoIkmo 6y agoWe've got literally record-levels of unemployment, and things are worsening still. There's no reason to believe that this has no impact on earnings. This isn't reflected in the Q1 figures, and even not fully in the Q2 figures. If there's a sharp rebound and everyone gets re-hired in a month when things open up again, and there's no second wave, then perhaps this will all blow over soon given valuations are based on future cashflows of which two months isn't a big deal. But there's lots of reason to believe that will not happen. There is no vaccine, the virus is highly infectious, restrictions will be relaxed but they will need to remain in partial effect and this will impact employment/productivity in many sectors. And eventually (particularly leveraged or low-margin industries) companies will simply collapse, there won't be any organisational framework to rehire these people and you'll just have to rely on new companies to form from scratch, which is a much slower process than rehiring furloughed workers under business-as-usual.