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Historical rate of return on stocks is about 7%. So in theory, a stock trading at a price to earnings ratio of 14 or less is good value, whereas a stock trading
by hhw 6y ago
Historical rate of return on stocks is about 7%. So in theory, a stock trading at a price to earnings ratio of 14 or less is good value, whereas a stock trading at 15 times earnings is not so much.
However, other factors could play a part, as certain industries are favoured over others, risk, projecting earnings growth, etc.
As such, you can make the argument that stocks are overvalued because they're trading at all time or near all time highs in terms of price to earnings ratios and other metrics. And especially so now given that projected future earnings will have dropped considerably while stock valuations have not.
- RivieraKid 6y ago> Historical rate of return on stocks is about 7%. So in theory, a stock trading at a price to earnings ratio of 14 or less is good value Why? I'm not saying it's incorrect but I've never seen such an approach to valuation.
- adrianhel 6y agoFor 7% a P/E of 14.285714285 or less would be good to be very precise.
- MiroF 6y ago> And especially so now given that projected future earnings will have dropped considerably while stock valuations have not. Really that depends on your time horizon. The Fed has signaled that it is willing to act aggressively to boost AD, so that seems to me to be a signal that projected future earnings will not be that low.