From Chart of the Day
Today's chart illustrates the price to earnings ratio (PE ratio) from 1900 to present. Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The maximum price investors were willing to pay for a dollar of earnings increased on several occasions since the late 1990s (e.g. dot-com boom, dot-com bust and financial crisis). Over the past year, corporate earnings have been trending lower. This has resulted in the PE ratio surging to a level often associated with significant stock market peaks.
Notes:
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