The Price-to-Earnings (P/E) ratio is a widely used stock valuation measure that compares a company’s current share price to its per-share earnings. This ratio can serve as a proxy for the market’s opinion of a stock’s earnings potential and growth prospects.

It’s expressed as a multiple and can be understood as how many years it would take for the earnings to pay back the share price at current earnings levels. This ratio is dynamic, influenced by the company’s profit, the market’s perception of its future prospects, and the general investor sentiment.

In macro terms, the average P/E ratio of market indices like the S&P 500 can indicate whether the overall stock market is expensive or cheap and shape investment strategies accordingly.

Rising, or expanding, P/E ratios may reflect optimism about corporate profitability or overall economic health.

Economic downturns typically impact P/E ratios negatively by dampening future earnings expectations. As earnings forecasts decline, even if stock prices do not change immediately, the P/E ratios will rise, indicating a market expectation of lower growth.

Conversely, in a recession, stock prices may fall faster than earnings, leading to lower P/E ratios, reflecting the market’s reassessment towards a more risk-averse stance. Understanding P/E trends can, therefore, provide critical insight into economic cycles and investor sentiment.

Recession Signal

The H.O.P.E Framework shows an expansion of P/E ratios, and the stock market as a leading signal of a recession. We assume this relates to a bear market rally.

Track this Yourself

You can easily track the P/E ratio of the S&P500 on TradingView: https://www.tradingview.com/chart/v7ZG3yMA/?symbol=MULTPL%3ASP500_PE_RATIO_MONTH