Summary: The P/E ratio is a statistic that, while all-encompassing, can be misleading in determining under- and overvaluation. Nonetheless regarding valuation it can be a useful guide in context.
I have written a lot about multiple expansion in the past year because I think this is a big issue. The United States is trading at a premium to other developed markets in terms of price to earnings and this multiple has been increasing even in the face of a recent increase in interest rates, which should cause multiples to contract. The real question here is one for fundamental analysis and valuation i.e. is this market as a whole valued fairly on a fundamental basis. And if not, what does that mean.
On this score, I like a recent analysis by Doug Short regarding P/E ratios. Here's the crux ...
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.