P/E Ratio
The Price-to-Earnings ratio compares a company's share price to its per-share earnings. It indicates how many years it would take for the earnings to pay back the share price at current levels.
What It Tells Us
P/E ratios function as a barometer for whether stock markets appear overvalued or undervalued.
Economic Signals
- Rising P/E ratios may suggest optimism about corporate profitability and economic conditions
- In a downturn the P/E can rise or fall. It falls when prices drop first. It rises when earnings fall faster than prices, as often happens in recessions.
How to Track
Monitor the S&P 500 P/E ratio for real-time data. The Shiller CAPE ratio gives a longer view. It divides price by the average of 10 years of earnings, adjusted for inflation.