The price-earnings (P/E) ratio* has as of late not been a prominent player in the discussions surrounding the general market environment. Despite being debunked the so-called Fed model is a more popular model on Wall Street. That aside geopolitics and inflation are the headline grabbers at the moment. However for two analyst the market's P/E ratio remains of interest.
Eddy Elfenbein at Crossing Wall Street noted previously that the market's P/E ratio was at a 10 year low. Some took that to mean that this was a buy signal for the market. However Eddy carefully notes the many factors that can affect the market's P/E ratio. In short the P/E ratio is an important tool, but trying to use it as a market-timing tool is fraught with danger.
John Hussman of the Hussman Funds has been preaching for some time now that the E in the P/E ratio is growing faster than expected. This is due to the fact that corporate profits as a percentage of GDP has been expanding, i.e. corporate profit margins have been expanding. According to Hussman at some point this expansion will hit a wall, with the likely outcome being faster wage growth. This would make the growth in earnings slow making the P/E ratio less attractive.
The bottom line from both of these posts is that looking at a market statistic like the P/E ratio in isolation is a mug's game. The crosscurrents affecting this measure are numerous. Therefore it is imperative that investors and analysts look behind the number to get a closer look at the market's dynamics. This is of course more difficult than saying the market is "cheap or rich" based on the P/E ratio, but will ultimately be more satisfying.
*It should be noted that most researchers use the inverse of the P/E ratio or the E/P ratio or earnings yield for its superior statistical properties. In either case the general conclusions are the same.