Stock Market Valuation
Mark Thoma had a tweet asking if the stock market is in a bubble.
I do not think so.
The market PE on trailing operating earnings is 15.5 and my model says that based on the historic relationship to interest rates and inflation the market PE should be 21.5%.
Obviously, either the market does not believe rates will stay this low and are using a higher interest rate or they expect long-run trend earnings to slip far below the long run trend of 7% The market PE is an expression of the present value of expected long-run earnings growth. The long term historic average for the market PE is 15, almost exactly where it is now. Of course there is no central tendency for the market to converge on a PE of 15. If you do a histogram of the market PE you will find that the probability of the PE being on any number between 10 and 20 is about the same.
Maybe we just need to look at the market from a simpler perspective.
What is simpler than P/E?
Hit the read more and look at the second chart.
NY Fed asks Are Stocks Cheap? and answers yes…