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With the new average inflation targeting monetary regime made official last week, P/E ratios may become permanently higher.

MrPowers 6y ago
Yep, it's possible P/E will be higher for a time. Not sure about permanently higher. The US has had dovish and hawkish central bankers in the past. If a hawk is appointed, P/E ratios might go lower. You provide a good starting point for a back of the envelope calculation. Suppose you think Tesla's long term sustainable P/E is 25. Then they need to start making 18 billion a year to justify their current valuation.
- BenoitEssiambre 6y ago
  Amazon is a pretty mature company and has had a P/E ratio above 100 for most of the past 5 years. With the new monetary regime, more companies may get that type of profile.
  - Retric 6y ago
    Amazon is still seeing 20+% annual revenue growth rates. That’s not what a mature company looks like. Amazon revenue for the twelve months ending June 30, 2020 was $321.782B, a 27.66% increase year-over-year. Amazon annual revenue for 2019 was $280.522B, a 20.45% increase from 2018. Amazon annual revenue for 2018 was $232.887B, a 30.93% increase from 2017. Amazon annual revenue for 2017 was $177.866B, a 30.8% increase from 2016. https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenue https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenu... By comparison Walmart’s revenue for 2018 was $500.343B and it hit $542.026B for the twelve months ending July 31, 2020. https://www.macrotrends.net/stocks/charts/WMT/walmart/revenue https://www.macrotrends.net/stocks/charts/WMT/walmart/revenu...
  - MrPowers 6y ago
    Your comment seems to imply a causal relationship between monetary policy and stock valuations, which is the type of relationship economists investigate: https://www.researchgate.net/publication/322006131_A_Study_on_the_Relationship_between_Monetary_Policy_Variables_and_Stock_Market https://www.researchgate.net/publication/322006131_A_Study_o... I don't know enough about the data to have an opinion. I do know that there are times in history when companies have sustained P/E ratios above 100 for many years (see Japan in the 1980s). You might be right, but from what I've seen, 100x P/E ratios usually come back down to earth.
- Retric 6y ago
  P/E ratios relate to the ROI possible with other investments. It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible.
  - MrPowers 6y ago
    > P/E ratios relate to the ROI possible with other investments. Yes, but P/E ratios also relate to a lot of other factors, like human psychology > It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. Maybe, but my (outdated) understanding of the literature is that the equity risk premium has not decreased, even as the world has gotten a lot richer > The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible. I don't understand this logic (could be right, I just don't follow it)

MrPowers 6y ago

Yep, it's possible P/E will be higher for a time. Not sure about permanently higher. The US has had dovish and hawkish central bankers in the past. If a hawk is appointed, P/E ratios might go lower. You provide a good starting point for a back of the envelope calculation. Suppose you think Tesla's long term sustainable P/E is 25. Then they need to start making 18 billion a year to justify their current valuation.

BenoitEssiambre 6y ago
Amazon is a pretty mature company and has had a P/E ratio above 100 for most of the past 5 years. With the new monetary regime, more companies may get that type of profile.
- Retric 6y ago
  Amazon is still seeing 20+% annual revenue growth rates. That’s not what a mature company looks like. Amazon revenue for the twelve months ending June 30, 2020 was $321.782B, a 27.66% increase year-over-year. Amazon annual revenue for 2019 was $280.522B, a 20.45% increase from 2018. Amazon annual revenue for 2018 was $232.887B, a 30.93% increase from 2017. Amazon annual revenue for 2017 was $177.866B, a 30.8% increase from 2016. https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenue https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenu... By comparison Walmart’s revenue for 2018 was $500.343B and it hit $542.026B for the twelve months ending July 31, 2020. https://www.macrotrends.net/stocks/charts/WMT/walmart/revenue https://www.macrotrends.net/stocks/charts/WMT/walmart/revenu...
- MrPowers 6y ago
  Your comment seems to imply a causal relationship between monetary policy and stock valuations, which is the type of relationship economists investigate: https://www.researchgate.net/publication/322006131_A_Study_on_the_Relationship_between_Monetary_Policy_Variables_and_Stock_Market https://www.researchgate.net/publication/322006131_A_Study_o... I don't know enough about the data to have an opinion. I do know that there are times in history when companies have sustained P/E ratios above 100 for many years (see Japan in the 1980s). You might be right, but from what I've seen, 100x P/E ratios usually come back down to earth.
Retric 6y ago
P/E ratios relate to the ROI possible with other investments. It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible.
- MrPowers 6y ago
  > P/E ratios relate to the ROI possible with other investments. Yes, but P/E ratios also relate to a lot of other factors, like human psychology > It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. Maybe, but my (outdated) understanding of the literature is that the equity risk premium has not decreased, even as the world has gotten a lot richer > The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible. I don't understand this logic (could be right, I just don't follow it)