http://www.journalfp.net/jfp0202-art10.cfm
From the summary:
"What does this mean for financial planners? First, do not use current P/E ratios to predict short-term returns. Second, financial planners should adjust their long-term expected returns to reflect the reality of current market conditions. If current P/E ratios are high, expect lower long-term average returns and if current P/E ratios are low, then expect higher long-term average returns. Finally, if P/E ratios are at historically high levels, expect long-term average returns on stocks to be low but above those of long-term T-bonds and T-bills. So the best advice to give investors when P/E ratios are high could well be to expect lower returns but still stay with stocks."
From the summary:
"What does this mean for financial planners? First, do not use current P/E ratios to predict short-term returns. Second, financial planners should adjust their long-term expected returns to reflect the reality of current market conditions. If current P/E ratios are high, expect lower long-term average returns and if current P/E ratios are low, then expect higher long-term average returns. Finally, if P/E ratios are at historically high levels, expect long-term average returns on stocks to be low but above those of long-term T-bonds and T-bills. So the best advice to give investors when P/E ratios are high could well be to expect lower returns but still stay with stocks."