In his latest Forbes article CMG Capital Management Group CEO Steve Blumenthal writes about the high median P/E ratio of the S&P 500 Index and historically what that has meant for forward returns for stocks. Excerpt and link to the story below. See all of Steve Blumenthal’s Forbes articles.
My favorite equity valuation indicator has long been the median price-to-earnings ratio. The P/E ratio is the measure of the share price relative to the annual net income earned per share outstanding. It can be measured by looking at a specific company, or an index like the S&P 500 Index.
I believe that valuations matter and can ultimately tell us a great deal about what the S&P 500 Index’s future 10-year annualized return may be. In the chart that follows, you can see that if you buy into the market when it is expensively priced, your subsequent annualized returns are low (red). The reverse is true when you buy into the market when it is inexpensively priced (green).
See the full story in Forbes: Plump P/E Ratio Suggests Subdued Stock Market Returns Ahead.
