Forward P/E And 10 Year Returns

Since 1988 stocks have always produced a negative 10 year return when the Forward Price to Earnings ratio was 22 or higher. This chart says nothing about 1 year returns. Then returns are all over the place whether the Forward P/E is 12 or 22. Although you can see from the chart that positive returns are lower 1 year out compared to when the Forward P/E is lower.

This data is for the US and I have no idea what these charts would look like if you would take an index like the Nikkei 225 or a European index such as the Euro Stoxx 50 or the AEX Index.

Forward PE and 10 year returns
Forward PE and 10 year returns

If you invest on a long term basis the lower the Forward P/E for the market the better your return could be.

Forward PE and 1 year returns
Forward PE and 1 year returns

As of the end of June 2019, the Forward P/E for the S&P 500 is 16.9. This was above the average of the last 30 years. This average is skewed to the upside though because of the extreme valuations during the 2000’s Dot-com bubble in stocks.

S&P 500 Forward PE ratio
S&P 500 Forward PE ratio

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