This is a very interesting chart. The S&P is plotted in yellow on the RHS in log, and the P/E is in black. Today, the forward P/E is 20.3, and the forecast is 25.3. You can see how this compares to history…in the ’87 crash, stocks got down to 10 times earnings. In the financial crisis, some 10 times earnings. So today, using Bank of America’s earnings forecast – again a forecast – valuations are at dot-com levels.
Now, it’s been shown for many years these things mean-revert. So, there are two expectations from this chart: Earnings either jump up quickly, or Price falls.
The second chart is US Consumer spending. Draw your own conclusions.
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