Price to Earnings (P/E) and Future Returns

Price to Earnings and future returns

We’ve had quite a bumpy ride in the stock market this year. A sharp decline in prices and elevated volatility have prompted many investors to question the role of equities in their portfolio. In the near-term, stock prices could move even lower, but today’s low prices may represent a buying opportunity for long-term investors.

P/E Ratio Chart Future Returns In the past, market valuation measures such as the price-to-earnings ratio (P/E) haven’t been a very good predictor of one-year returns. Over five years and longer, however, low forward P/E ratios have had a much stronger relationship with future returns. As can be seen in the chart, a lower P/E ratio (horizontal axis), can lead to higher 5-year annualized returns for investors (vertical axis). This is an important measure we take into consideration when rebalancing portfolios.

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Published: February 24, 2016

Authored By: Chad A. Sander, CFP®

Phone: 812-602-6302


No forecast can be guaranteed. The views expressed are those of the Payne Wealth Partners Investment Committee and are subject to change at any time. These views are for informational purposes and should not be relied upon as a recommendation or solicitation or as investment advice.


The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.

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