For the past two weeks, I have presented a host of evidence that Price to Earnings (P/E) ratios would have trouble improving, even as actual profits and earnings grow in a modestly recovering economy. Changes in accounting standards, corporate governance and public perception will so change the rules as to how we measure profits, that public corporations will be fighting a strong head wind to show improved P/E ratios. Since this is a primary measure of the value of a stock, this "new profits era" will be a major downward pressure on stock prices for several years.
2 posts tagged with “Price To Earnings”.
The end of this week's e-letter will be Part Two of "Why P/E Ratios Will Not Rise As They Normally Do After a Recession." The whole piece will be a chapter in my new book, Absolute Returns. Of course, I will have to think of a snappier chapter title. But snappy or not, it is important you understand the dynamics that are working to hold down P/E ratios today, and why this means the long term secular bear market now in session will remain so for several years to come.