21 May COTW: Stock Market P/E Multiples vs. Misery Index
The chart below can be downloaded here.
Price-to-earnings (P/E) multiples are effectively the cost/price in dollars of purchasing one dollar of a company’s earnings. The current market P/E of about 26x tells us that investors are willing to pay more than twice as much per dollar of earnings than they were at the lows of the last bear market in 2009. The P/E calculation below uses five-year trailing average earnings to smooth out the earnings component of the series (the twelve-month trailing P/E is a similar 25x). P/E multiples can be calculated dozens of ways, but generally they are currently near the highest levels we have seen throughout history. The “forward P/E” based on estimates of the next 12-month’s earnings is closer to 17x, although this is also above average and forward P/Es are meaningless at economic or earnings inflection points.
This week’s chart looks at the relationship between the prevailing P/E multiple and the U.S. Economic Misery Index (inverted), which is the sum of core inflation and the unemployment rate. The logic goes that the happier the average consumer (or investor), as proxied by inflation and the labor market, the more likely they are to pay up for stocks. Looking forward, if inflation rises and/or the labor market has peaked, history would suggest P/Es may have also peaked for this cycle (and vice versa).
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