What we can see is that average earnings are not too high compared to the historical average. At present the S&P 500’s PE ratio is 16.3; still below the 33-year average of 19.7.
In fact, the earnings ratio has been steadily declining since its peak in the dot-com boom in 1999/2000, with a spike to 24 after the financial crisis at the end of 2009. If this was a bubble then we would, in my opinion, be seeing a PE ratio much higher than we’re seeing currently.
The PE ratio is not a foolproof metric. It has flaws: notably its vulnerability to inflation and the fact that earnings for individual companies can be manipulated. In addition, PE is a backward-looking measurement, not taking into account future developments.
Most indicators have their own flaws which may undermine any other assessment of the stock market; but from this data it cannot be argued that the market has become expensive. There seems to be plenty of upside in PE ratios, which at least suggests that this market rally has not run its course just yet.
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