Saturday, May 12, 2007

Irrational exuberance?

Seems like it, but I just came across this chart which suggests it may not be. Colin Twiggs writes a (free) weekly stock market letter. This week he included this graph. The light blue line shows that the S&P earnings/share has been growing rapidly. More importantly, the magenta line shows that the earnings yield (earnings per share divided by price, which is the inverse of the PE ratio) is at a reasonable level in historical terms. The current earnings yield of nearly 6% is a PE ratio of approximately 17, which according to the chart is where it was before the bubble of the late 90s. Apparently companies are just making lots of money.

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