P/E Doesn’t Predict Future Earnings

[Midpack]

Another POV to consider...

P/E Doesn't Predict

Some people say today’s price-to-earnings ratio (P/E) is a sign of overvaluation. Others say it’s a sign of improved earnings growth in the future. In my view, it’s neither. The current valuation of the stock market doesn’t tell us anything about the future of corporate earnings.

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

 

[NW-Bound]

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.

 

[Running_Man]

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?

 

[haha]

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.

Ha