One of the metrics I use when looking at stocks it the price to earning ratio. I think of it as an indication of the rate of return on an investment. This is not entirely true. Other characteristic also affect the future behavior as future expectations of earnings also play a role, and trust in the management etc. Dividends provide a more sure income.
I used to think of a P/E ratio for the market of 20 as nominal. In the late 90’s this was greatly exceeded as interest rates fell, making stocks more attractive. It was also a period of “irrational exuberance” as the stock market bubble inflated. This points out that competing investments also influence stock prices.
After seeing the above chart, I’ll guess that the “nominal” range of P/E for the market is 15 to 20. We are nearing the top end of that range. Also future estimates of earnings for the next 12 months are lower than the past 12 mos, suggesting a peak. But with Fed stimulus and nonexistent interest rates, it is foolish to predict stocks won’t go higher.
Disclaimer: Historic performance is no guarantee of future returns. Use at your own risk. Your mileage may vary.
The above chart is from www.multpl.com
other relevant sites:
(c) David B. Snyder, 2013