The Market and Future Earnings

I was playing with some numbers I got off Robert Shiller’s website. I was curious to see historically how long it’s taken the market to earn back its value. The P/E ratio is concerned with past earnings, but I wanted to see how good the market is at valuing future earnings.
It turns out, the market is generally worth about its earnings for the next 40 quarters, or 10 years. This makes sense since the historic P/E ratio is around 14-16, so going by normal growth, it ought to take roughly ten years to earn your money back. Let me add that the market has been known to be wrong about such things.
Here’s a look at the S&P 500 compared with its earnings ten years hence. Because of that restriction, the chart has to stop in the late 1990s.
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From the 1929 peak, it took the market 24 years to earn its money back. In 1942 and 1982, it took less than seven years.

Posted by on September 2nd, 2009 at 11:17 am


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