Do even small amounts of inflation cut into stocks’ value as measured by the price-earnings ratio? Yes, according to research by economist David A. Rosenberg at Merrill Lynch. WSJ: “In an inflationary environment, the hidden value-related pitfall for investors is that as earnings – or “e” in the “p/e” equation – go up, the ratio itself goes down, just as any fraction does when its denominator increases.”
Historical S&P500 P/E
The only way to avoid that scenario is if prices-the top number in the equation-keep pace, increasing as quickly as the “e.” That often doesn’t very happen. As earnings growth slows, “damage to the p/e ratio might not be as steep as in previous cycles. But falling values could still scare off enough investors to keep stock prices flat over the next year or so.”
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Quote of the Day:
“Everything in the future is a wave, everything in the past is a particle.”
–Lawrence Bragg (1890-1971)