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P/E Doesnít Predict Future Earnings
Old 10-31-2013, 01:47 PM   #1
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P/E Doesnít Predict Future Earnings

Another POV to consider...

P/E Doesn't Predict

Some people say todayís price-to-earnings ratio (P/E) is a sign of overvaluation. Others say itís a sign of improved earnings growth in the future. In my view, itís neither. The current valuation of the stock market doesnít tell us anything about the future of corporate earnings.

The marketís P/E is considered an important valuation indicator. People use it to predict all kinds of things about the future. Itís used to determine if the stock market is pricey or cheap; itís used to compare the attractiveness of different stock markets around the globe; and itís used to make bold predictions by market gurus, who are then showered with gobs of media attention.

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Old 10-31-2013, 02:26 PM   #2
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True. Wars, tsunamis, SARS, pandemic flu, a madman with a finger on a nuclear weapon launch button can have everything turned upside down.

There goes the projected P/E. And we will scramble back to our FIRECalc to make some runs, but that only has "aftcasting" capability, not the forecasting that we need.

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Old 10-31-2013, 03:07 PM   #3
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So if I under stand what he is saying:
1)PE is not a predictor of future earnings.

So that means the entire market valuation is driven then by what? I realize Rick is averaging the entire market's PE ratio which makes the PE ratio of the individual stocks meaningless, but does anyone really think that Tesla's PE ratio relative to the PE ratio of Microsoft does not reflect the anticipated future growth of earnings of those companies by investors?
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Old 10-31-2013, 03:41 PM   #4
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Originally Posted by Midpack View Post
Another POV to consider...

P/E Doesn't Predict
The person making this assertion is confused. PE doesn't predict future earnings; but PE10 does a very good job of predicting stock market performance over the following 10 years. These are two often unrelated series. I have published the scatter plot ton this forum before, but it is all over the web for anyone interested and as yet unconvinced.

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