Source: Robert Shiller, Princeton University
- From the inflation adjusted chart above we see how expansion and contraction of the PE (price to earnings ratio) is the major factor in determining stock market performance.
- Real inflation adjusted S&P500 composite earnings (the green line on the chart) has increased in a modest linear fashion (lower dashed red line) over the past 140 years and has tracked real GDP growth. Meanwhile, Wall Street's marketing machine has convinced investors to pay much higher PE's (upper parabolic dashed red trend line) than what would otherwise be justified by earnings and GDP.
- The divergence in the earnings trend line and the S&P500 trend line has widened significantly since 1990.
- The analysis above is only for the broad U.S. stock market as measured by the S&P500. Our most recent newsletter speaks to our research on the current outlook for foreign markets. (subscribe now)
