The largest contributing factor to equity returns is the P/E ratio. The expansion or contraction of the broad market P/E ratio creates secular bull and bear markets. The chart below from Crestmont Research breaks down the components of total return for the S&P 500 for ten-year rolling periods.
Yale Professor Robert Shiller’s 10-year Average Inflation-Adjusted PE Ratio, also known as CAPE, Shiller PE or PE10, provides the best longer-term market gauge available. PE10 is the stock index price divided by the average real earnings from the previous 10 years – the time period is designed to smooth out near-term noise in the data. The basis for this approach is the finding that earnings valuation ratios provide predictive power for long-term stock market returns.
It's science, dammit! Like global warming, only real!
2 comments:
Insightful chart. I remember the days when the P/E ratio was the standard for buying and the longevity of that P/E. Those were the days before cooking the books became standard.
Nice chart!! I appreciate it. Thanks for sharing. Looking forward to your further informative posts.
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