PT  - JOURNAL ARTICLE
AU  - Robert A. Weigand
AU  - Robert Irons
TI  - Compression and Expansion of the Market P/E Ratio
AID  - 10.3905/joi.2008.701961
DP  - 2008 Feb 29
TA  - The Journal of Investing
PG  - 55--64
VI  - 17
IP  - 1
4099  - https://pm-research.com/content/17/1/55.short
4100  - https://pm-research.com/content/17/1/55.full
AB  - Compression and expansion of the average market P/E ratio significantly affected U.S. equity returns in both the bear market of 1969–1981 and the bull market of 1982–1999. We compare two models of the market P/E ratio to determine which paradigm is most useful for financial analysts and portfolio strategists as they anticipate the future direction of the market P/E. We find that the “Fed Model” where investors benchmark the earnings yield on stocks to the 10-year T-note yield—provides a better description of how the market P/E ratio changes over time than the mean-reverting model posited by Campbell and Shiller [1998, 2001]. These results suggest that, as long as inflation and interest rates remain low, high market P/E ratios and the low expected return on equities that accompany high-P/E environments could persist for an extended periodTOPICS: Security analysis and valuation, in markets, financial crises and financial market history