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Will P/E-ratio (trailing 12 mon) of the Dow Jones Index DJIA climb above 17.5 at any day in 2016 ?


Will P/E-ratio (trailing 12 mon) of the Dow Jones Index DJIA climb above 17.5 at any day in 2016 ?

Asked by: Super UserJosef Biesenberger in Business » Indices
Settled on 04/08/2016 07:57 Settled by Super UserJosef Biesenberger
Winning option:Yes



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Interest Rates Drive Stocks As Earnings Take Back Seat

Many strategists figure that stocks are fairly valued when their earnings yield -- which is the inverse of the P/E ratio -- is equal to bond yields. Thus, if bond yields are 5%, then stocks are fairly valued at about 20 times the coming year's earnings. But there's a problem with this model. As Charles Hill, director of research at First Call notes, it would imply Japan's bond yields of 1% and lower, deserve stock P/E ratios of 100 or higher. That seems to indicate that falling interest rates stop helping stocks when they show the economy is in deep distress, bordering on deflation. Could it happen here?
The fact earnings are falling without rising interest rates is a "symptom of the current deflationary environment," argues the Bank Credit Analyst, a financial-forecast journal. In times of deflation, it's easy for stock prices and interest rates to fall at the same time. While not forecasting deflation, the Bank Credit Analyst argues, the profit outlook is tough and "there is probably too much complacency about the potential for easier monetary policy to impact the long-run earnings picture."


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