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There's even a historical graph of this, called the Shiller P/E Ratio: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe We are still at the
by ahelwer 6y ago
There's even a historical graph of this, called the Shiller P/E Ratio: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
We are still at the highest point ever except for the dotcom bubble and black tuesday of 1929 (and directly before the recent crash, although not by much).
So to answer the parent, pick a ratio somewhere below that. Price has been the main thing moving upward disproportionately for the past decade, now earnings will take a dive.
- mrep 6y agoThe Shiller Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years and the recent earnings weren't really affected by the virus yet and thus the current 10 years of earnings happen to align with the longest period without a recession in US history so it's no surprise that metric is high. The current P/E ratio is 20.53 [0] and there have been many periods in which it has been higher. [0]: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio
- christophilus 6y agoWe still require a 25% drop in P/E to bring us back to the historical mean. There are reasonable arguments as to why we may never mean revert, why this time is different (possibly permanently low interest rates, stocks as a leading indicator of future inflation due to Fed printing inflating asset prices , etc). But as a rule, I like to bet on mean reversion, not against it.
- RivieraKid 6y agoHigh Shiller P/E doesn't necessarily mean stocks are overpriced. Intrinsic value is based on future cash flows, what happened 10 years ago may or may not be relevant to future cash flows.