Price-Earnings Ratio 2008

PRICE / EARNINGS RATIO 2008Last entry: 1.29.08

The cycle of Price / Earnings Ratios on the S&P 500 are a solid indicator of when a secular market cycle is topping or bottoming. The short answer as to where we are now in this cycle could be best termed mid-cycle, not cheap, not expensive, but trending lower.

Ed Easterling points out in his book “Unexpected Returns” that despite the general contention that the economy and the stock market are closely connected, the facts get in the way of confirming conventional wisdom. He goes on to say “although economic growth does increase the earnings portion of the price/earnings ratio, the trend in the overall level of the P/E ratio is frequently the largest driver of actual returns.”

We will be including P/E charts and analysis from thechartstore.com that provides insight into this important factor in long-term market analysis.

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